Morgan Stanley Notices The Strange Thing Taking Place Off The Singapore Coast

Last Friday we first reported on two surprising developments: one was a record accumulation of crude tankers on anchor or steaming just off the coast of Singapore in the Straits of Malacca, awaiting higher oil prices to offload their precious cargo; the second was that as a result of previously profitable contango trades now flattening and making storage no longer profitable, oil shippers are now forced to ask for bank loans to fund offshore storage costs.

Over the weekend Morgan Stanley's analyst Adam Longson also noticed our report, and released a report focusing on the problem of floating storage which continues to grow, especially in Asia, and how he thinks it will impact the price of oil.

This is what he said, most of which is a recap of what we said on Friday.

Floating storage continues to grow despite outages and poor economics. According to Reuters reports, at least 40 supertankers laden with crude are anchored offshore Singapore as floating storage. In fact, according to Reuters, the volume stored offshore Singapore is up 10% WoW despite outages, to 47.7 mmb. The increase in floating oil comes despite disruptions in the Atlantic Basin and an out-of-the-money floating storage arb, suggesting markets are not as healthy as sentiment suggests. It also highlights the speculative nature of much of the oil bounce this year (recent disruptions aside).

 

 

 

Southeast Asia is getting worse, with offshore volumes reaching the highest level in at least 5 years. According to Poten & Partners, “the volumes of oil stored at sea in South East Asia - predominantly Singapore and Malaysia - appear to have increased significantly”. Remember that the Straits of Malacca, carry 15+ mmb/d of ~56 mmb/d of world oil maritime trade – or ~27% of all seaborne oil - primarily from the Persian Gulf.

 

 

 

Falling global refinery maintenance may help seasonally, but we don’t expect much relief. Many local refineries have already made purchases for peak summer runs. Bloomberg also calculated 74 VLCCs already bound for China, the highest in 3 weeks, and Chinese imports are elevated in all other data sources. Yet, the offshore glut persists.

 

Unprofitable storage arbs hide a growing debt-fueled offshore trade as traders search for places to store oil. We estimate the Brent 1M floating storage arb is -$0.48/bbl while 12M is -$6.11/bbl, implying no incentive to store oil on ships. Yet, banks are seeing a sharp uptick in interest to finance storage charters. This storage is not happening for profit. Rather, the market is looking for places to store oil. To profit, traders need to hope for oil prices to rise enough to pay for the new debt incurred for this storage.

 

Similar situations are being repeated in the Gulf of Mexico and North Sea, but to a lesser degree. Local supply disruptions and seasonality have reportedly allowed some of that crude to be drawn down, but unsold cargoes and congestion remain.

 

Product markets are unhealthy too. The situation in Asian gasoline is no better, with gasoline tankers floating offshore in Asia, and the contango is more notable. Gasoline stocks remain stubbornly high in available weekly data, esp in Singapore where they built counter seasonally. Total product stocks in Japan and ARA also built counter seasonally.

Finally, some additional facts: according to shipbroker Gibson, nearly 9% of the global supertanker fleet is currently on storage duty: this is an increase of 40% since December despite a contango which no longer supports profitable offshore storage. As JBC notes, "the uptick in storage appears to be more of a global trend reflecting operational and logistical issues than traditional storage plays." It then notes the following:

After 10 consecutive quarters of implied global oil stockbuilds, we see the uptick in floating storage as an indication capacity at the more convenient onshore locations is largely full. If this assumption is correct, then we should see volumes in floating storage decrease in the coming weeks given the expected Q3 stockdraw.

When it comes to onshore storage, JBC is right: as we pointed out last week using Genscape data, "Inventories At Cushing Are Close To Maximum Operating Capacity", but it is not just Cushing - it is virtually every other land-based storage too. As for JBC's conclusion: "this situation (growing floating storage and flattening market structure) should not be sustainable, potentially providing a key reason why prices have failed to break above $50 so far."

They also warn that if the situation does not improve, it will become a drag on front-end prices. The only question is when.