SINGAPORE – Dozens of oil supertankers have dropped anchor off the coast of Singapore with no clear timetable for when they may offload millions of barrels of unwanted oil they have been chartered to carry.
The Asian oil-trading hub’s onshore storage facilities are at capacity, leaving tankers of varying sizes crowding the seas to serve as floating storage vessels.
To be sure, Singapore isn’t alone in struggling to store surplus barrels. Global demand for oil has plummeted by as much as 30% this year, equal to around 30 million barrels per day, as Covid-19 lockdowns bring much of the global economy to a halt.
An unprecedented supply glut is simultaneously overwhelming global storage facilities as oil producers, refiners and traders hunt for space to store their crude until demand returns and supplies can be sold.
When West Texas Intermediate (WTI) futures contracts for May tumbled into negative territory on April 20, a historic first, the price collapse was attributed to market worries about fast-dwindling storage capacity.
WTI prices are spiralling again after falling nearly 25% fall on Monday (April 27), closing at US$12.78 a barrel. The US benchmark continued to slide in Asia trading on Tuesday, with June futures slipping to $11.86 per barrel after a 7% drop. Brent crude, the international oil benchmark, traded at $20.40 per barrel.
Onshore inventories in the United States are rapidly filling up amid fears that Oklahoma’s Cushing storage hub could reach maximum capacity in May, raising the possibility of a negative price plunge for June’s WTI futures contracts.
But the topsy-turvy oil market has seen business boom for the world’s fleet of supertankers, a growing number of which are taking on oil at a premium that industry sources say is around eight times their average daily break-even costs.
Ashok Sharma, managing director of shipbroker BRS Baxi in Singapore, told Asia Times that average daily freight rates for supertankers, also known as very large crude carriers or VLCCs, are now between US$160,000 to $170,000 per day, up from average rates of about $10,000 day in April 2019. Average daily break-even costs, Sharma said, are around $25,000.
“Freight rates will, at the very least in the short term, maintain themselves at firm levels as long as the contango remains compelling enough to store oil at sea and continues creating a demand for VLCCs,” he said. “Onshore storage is close to being exhausted, so the only option for a trader looking to store oil is out at sea.”
Contango refers to a market structure where future supplies are more expensive than those for immediate delivery, creating an incentive for traders to stockpile excess crude until inventories can be profitably sold. But transactions are only profitable when the contango is wide enough to cover storage and other costs.
“We’ve seen a preponderance of six-month period contracts for VLCCs with storage tied in because the contango seems to make sense over a period of six months so traders can maximize their earnings,” said Sharma.
Around 10% of the world’s fleet of 815 supertankers have been booked in recent weeks to store a record amount of crude oil, according to shipping sources. The mammoth vessels each hold 2 million barrels, with total estimates ranging from 160 million to 200 million barrels currently being stored at sea.
“Using tankers to store crude is not unprecedented, but the volumes we are currently seeing are,” said Michal Meidan, director of the China Energy Programme at the Oxford Institute for Energy Studies. “The collapse in demand is unprecedented as well. The onus is now on finding enough storage capacity for both crude and [refined] products.”
An estimated 80 to 100 supertankers are now storing oil off the US Gulf Coast and in the narrow waters of the Singapore Strait near to where major refining capacities exist. With oil supply still running well above demand, as many as 200 supertankers could be required for storage, according to industry predictions.
IHS Markit estimates that about 200 million barrels are currently available for use as floating storage out of a total crude oil fleet capacity of 2.4 billion barrels. The market analytics provider expects the sharp demand downturn will free up ships to carry another 100 million barrels for storage, nearly equivalent to daily global oil demand in 2019.
“Prices that some of these vessels are getting now is making it very tempting for the ship owners to just focus on renting ships out for storage rather than what they’re normally supposed to be doing, transporting oil from producers to refineries,” said Ole Hansen, head of commodity strategy at Saxo Bank.
As traders rush to find storage at sea for their surplus barrels, shipping brokers say even smaller Suezmax vessels, which have a carrying capacity of one million barrels, are being leased for storage. Freight rates are expected to remain sky-high as floating storage is used to relieve burgeoning pressure on land-based oil inventories.
“What’s happening is that VLCCs that are fixed for floating storage contracts will present themselves again for loading at a date that is much later than if the situation was normal, i.e. when floating storage options are not being sought after,” said Sharma.
The floating storage boom comes at a precarious time for commodity traders in Asia, with banks withdrawing financing from the industry following the implosion of Hin Leong Trading, one of Singapore’s biggest oil traders, which had racked up dramatic losses on oil futures contracts.
Click here for an Asia Times’ report on how Hin Leong’s collapse could augur wider trouble for the region’s oil sector.
That could potentially complicate regional players’ bids to finance the physical taking of crude deliveries, traders say.
Storage fundamentals continue to be the main concern of markets as concerns rise that there are fewer and fewer places to store oil supplies amid the coronavirus-induced collapse of demand. Even record output cuts by the Organization of the Petroleum Exporting Countries (OPEC) and allies are seen as being too little, too late.
“It might not be until the second half of this year that we start to see some kind of rebalance between demand and supply, assuming that all the OPEC countries and other producers cut by as much as they have pledged to,” said Peter Kiernan, lead energy analyst at the Economist Intelligence Unit (EIU).
“But the next two or three months are going to be pretty brutal. Producers just have to face reality, they have to cut back desperately,” he added. “They just can’t afford to keep on producing if they can’t find buyers and they’ve got nowhere to store their oil.”
OPEC, Russia and other major producers will cut production by 9.7 million barrels per day from May 1, equal to around 10% of daily global supply. That amount is more than double what OPEC had agreed to cut to support prices during the 2008-09 global economic crisis, but not nearly enough to offset weak current demand, say analysts.
“Given uncertainties about travel and consumer habits post Covid-19, which could lead people to travel less and therefore consume less oil, even the medium-term prospects for oil are looking weak, further weighing on the industry,” Meidan told Asia Times.
“Demand should start to recover toward the end of the year and supplies will have adjusted by then, but lower prices are likely to remain for a while.”
Facing a bulging supply glut, industry sources expect refineries, particularly in North America, to reduce output or even shut down uneconomic fields and wells amid expectations that they will not be able to store the oil they produce.
“There’ll be a certain threshold where they are going to have to literally stop producing oil,” said Ryan Clarke, a former investment banker and a senior fellow at the East Asian Institute, a Singapore-based think tank. “We’re going to see a lot of oil and gas companies having to either furlough or downsize even further.”
Global storage onshore was estimated to be around 85% full last week, according to data from consultancy firm Kpler.
Market anxiety over storage capacity is also pushing liquidity away from WTI futures contracts for June amid reports of exchange-traded funds buying contracts for months later in the year, which analysts say could further stoke price volatility.
The May contract’s negative price crash, which saw it collapse to a punishing -$37.63 a barrel, occurred on the penultimate day of trading just prior to the monthly contract’s expiry, or when buyers were obliged to take physical possession of the oil and incur storage costs. Fears are mounting such a scenario could play out again.
“It’s possible that prices could dive into negative territory again towards the last few days of the June contract if people are desperate to offload their positions, but there is no one willing to buy and if there is no storage available in the US,” said Kiernan. “If the June contract stays under pressure there is a possibility of a repeat performance.”