Crude oil moves into floating storage as contango widens with China's import cuts: sources

New York — International trading houses have started to store crude oil on VLCCs, either in compulsion or anticipation of higher returns in the coming months, as the crude market structure moves deeper into contango with China delaying purchases amid the coronavirus epidemic, market participants said Tuesday.

Several VLCCs have already been taken on time charter and more are in the offing, they added.

In one such fixture a 2000 built VLCC, the Ridgebury Progress, was taken by Vitol with options to store crude near Singapore for three to six months, brokers in Singapore said. Vitol executives, however, could not be immediately reached for comment.

Chinese ullage is full and their refineries have reduced production, leaving them with not much choice except to cancel or delay crude deliveries, and this in turn has resulted in the use of floating storage, a VLCC broker in Tokyo said.

Furthermore, VLCCs that were chartered at relatively higher rates for loading in the West and delivery into Asia, are now floating around Singapore looking for buyers to take small parcels, which can then be transferred to cheaper ships, the broker said.

"Some charterers are already using VLCCs as floating storage or have plans to take ships on time charter to do so," a broker in Beijing said.

According to industry sources, most of these floating storage are being fixed for around Singapore at a rate of close to $20,000/day. In comparison, a modern non-Eco VLCC, less than 15 years old, can command a one year time charter rate of around $33,000/day, brokers said. For an Eco-VLCC, it is higher at around $40,000/day, they added.

However, the broker in Beijing pointed out that only the older ships are used as floating storage.

Modern tonnage that is less than 15 years old are not willing to be used as storage as they run the risk of getting moss at the bottom and cleaning it will entail additional expenses, he added.

At the moment, there are two or three inquiries for older VLCCs to be used as floating storage for a duration of at least one month, with options to extend the duration for up to a year, the broker said.

It is common to see VLCCs taken for storage purposes when crude oil is in a contango market structure because traders will be able to make a gain by buying the crude and storing it only to sell at a higher price at a later date.

However, according to a few market participants, the crude oil contango at the moment is not sufficiently deep for trading companies to make a beeline to store crude in VLCCs.

The current crude contango structure is shallow and there are only inquiries, a source with a VLCC owner said. It is necessary for the differential between future and current prices to widen before more ships will be chartered for storage purposes, the source said.

The contango is narrow and has emerged only because demand has disappeared amid lingering fears that the global economy may slip into a recession if the coronavirus epidemic persists for a longer duration, the same VLCC broker in Tokyo said.

The shadow of the coronavirus looms large on the shipping market and the industry is bracing for a tough first quarter of the year. The general perception in the industry is that the epidemic may last several weeks or even months and the strain is already evident with several airlines canceling flights to Chinese destinations regardless of whether the area has patients infected with the coronavirus.

Shipment of clean products such as jet fuel and gasoline have been impacted as travel within, into and out of one of the world's largest country has declined, pulling demand down, market sources said.