Notably, two weeks ago we cautioned that with the contango no longer leading to profitable offshore storage of oil, many shipping companies would have to start offloading their cargo, or as we recently reported, have started incurring debt to fund said storage costs in hopes of avoiding shifting storage to land:
[S]toring oil on ships can be profitable when prices for future delivery of crude are higher than in spot market, a term structure known as contango, as long as future prices are high enough to offset tanker charter costs. However, with the one-year contango for Brent futures collapsing from $7.60 per barrel in January to just $4, far below the $10 that traders say is currently required to make floating storage financially attractive, suddenly parking oil offshore leads to storage losses. The same goes for WTI.
At a charter cost of more than $40,000 a day for a Very Large Crude Carrier (VLCC) that can store 2 million barrels, the contango is nowhere near steep enough to make it profitable to store oil on tankers for sale at a later date.
This has led to a dramatic development in the oil market: debt-funded storage. Reuters writes that the need to store oil is so strong that traders are calling up banks to finance storage charters despite there being no profit in keeping fuel in tankers at current rates.
"We are receiving unusually high amounts of queries to finance storage charters," said a senior oil trade financier with a major bank in Asia. "These queries come from traders fully aware that they will not make a profit from storing the oil. This isn't a trade play, it's the oil market looking for places to store unsold fuel," he added.
As we warned, this is a very dangerous idea, and one which only works if oil prices continue rising; meanwhile it is only a matter of time before much of the 200 million barrels in oil parked offshore have to come back on land. But while we wait for the offshore oil glut to start being offloaded, one place where tankers are already delivering their wares is in the massively glutted gasoline market.
As Reuters reports, the number of tankers storing gasoline in waters off Singapore and Malaysia is dwindling as the fuel is sold off or shifted to cheaper onshore storage because of changes in forward delivery terms. With the economics of storing the fuel on tankers no longer viable due to a stronger forward market, there are now fewer than three long-range (LR) vessels holding gasoline in the area.
According to Reuters, citing traders, by the end of this week all remaining tankers could be discharged as the fuel's owners seek to sell the gasoline or store it more cheaply onshore. "It's not economical to store gasoline on ships now compared to before unless they have no buyers or land storage," said one Singapore-based gasoline trader with knowledge of the deals. Ships recently used to store gasoline were chartered by Statoil, Total, Vitol, Gunvor and Unipec, trading arm of China state refiner Sinopec.
A typical LR tanker can store 55,000 to 75,000 tonnes of gasoline, depending on the size of the ship.
The reason why gasoline cargos are now starting to be aggressively offloaded is that the gasoline market forward price curve will flip to backwardation from July, meaning lower prices for future deliveries than for those sold immediately. That contrasts with the contango structure for the first-half of the year, with future deliveries more expensive than prompt cargoes, making it attractive to store gasoline for sale at a later date. A month ago, April in the forward curve was about $1 a barrel below May, with the June price about 30-40 cents below July. This contango will flip into backwardation from July.
The current weak market is in part due to an expected fall in gasoline imports from top regional consumer Indonesia, where state oil firm Pertamina is expected to reduce imports later this year as it negotiates deals to make more of the fuel. Even if the stored fuel is not sold, traders are shifting the gasoline into onshore tanks because they estimate it costs at least $100,000 less a month to hold the fuel on land.
According to Reuters, Chinese gasoline exports are also up more than 50 percent for the first four months of the year, although going forward, China could scale back its volumes. "Maintenance in May and June, particularly at (Chinese) teapot refiners will ... lower gasoline output," analysts at BMI Research said in a note to clients this week, while strong Chinese demand would help tighten the regional market.
Perhaps, but meanwhile Chinese gasoline stocks have never been greater as the country imports tremendous amounts of gas which apparently has no end-user demand, which is forcing China to store even more of it, both on land and in the sea.
And now that the curve is about to enter backwardation, all that gasoline stored at sea is about to come back to land, and bring China's gasoline stocks to even higher record levels.
In other words, the global glut is now not only at the crude and distillate level, but also in global gasoline stocks.
It also means that contrary to conventional wisdom that Chinese end demand is driving global consumption, China is merely storing copious amounts of the refined crude production chain in land and on sea, in hopes demand comes back. So far it is failing to do that.
And now, we await for the crude contango to tighten further and force some of the 200 million barrels of oil held at sea to come back on shore, where it will have to be promptly sold as much of the world's onshore storage is practically full.