Floating oil storage at two-month highs as volumes off Asia rise

London — The amount of crude and condensate hoarded on oil tankers worldwide has seen a steady rise in the past few weeks despite poor storage economics, due to increased port congestion in North and Southeast Asia, shipping sources and analysts said Feb 3.

But most oil industry watchers expect floating storage volumes to trend lower again as the market structure continues to be backwardated, making storage unviable.

"Floating storage enquiry is absent, despite the costs of booking VLCCs being rock bottom," a shipbroker said. "While the costs of chartering a ship for six months are now about $22,000/day, no charterer wants a ship in this market."

During the floating storage rush of March and April last year, time charter bookings for short periods of around six months were estimated at around $120,000/day for VLCCs.

Data intelligence firm Kpler estimates that floating storage volumes of crude and condensate amounted to 113.60 million barrels for the week beginning Feb. 1, the highest since late November.

The Kpler data estimates the volume of oil on tankers idled offshore for seven days or more.

Around 63% of this storage is outside China, Singapore, Malaysia and Indonesia.

"Barrels are piling up in Singapore as a lot of charterers have bought crude in anticipation of the New Lunar Year festivities," another shipbroker said. "However, the congestion will start going down soon as Asian buyers will use these cheaper barrels first."

Strong demand in the refining hubs of Singapore, Malaysia and China have resulted in higher traffic, causing congestion around key ports, sources said.

Floating crude volumes fell to an 11-month low of 85 million barrels in early January after they had peaked at over 210 million barrels in late June.

"Indian charterers will also start to unwind floating storage barrels as the financial year approaches its end and refineries go into maintenance, hence reducing imports into the country," the second shipbroker said.

Backwardation

The physical oil markets have strengthened in recent months despite some demand uncertainty in the West.

Asian demand has helped to keep the market relatively sturdy and the surprise output cuts by OPEC kingpin Saudi Arabi have helped to tighten global crude supplies.

This has all influenced the Brent forward curve, which is now displaying a resilient backwardated structure, a sign of a healthier market.

In a backwardated market, the forward price of oil is below the prompt price, inferring strong prompt demand and a tightly supplied market, discouraging storage.

This week, the two front-month Brent contracts have shown a backwardation of 30-40 cents/b, the strongest market structure since February 2020, according to S&P Global Platts data.

In 2020, the two front-month Brent contracts averaged a contango of 54 cents/b.

If Asian demand remains strong, this will encourage traders to clear more floating storage barrels, and take advantage of the change in market structure.

"Market fundamentals offer a mixed picture with lingering weakness in Q1 followed by tightening balances into the third quarter and then perhaps a softer picture later in 2021 and into 2022 with supply growth," Platts Analytics said in a recent research note.