Oil price crash to spur storage plays; tanker owners upbeat

London — As oil prices continue to crash dramatically, oil traders are looking to hold more barrels in storage to cope as the oil markets face a supply glut caused by a lack of OPEC+ cuts and the impact of coronavirus on oil demand.

This bodes well for tanker owners and storage companies, both of which have become more upbeat as oversupply of oil is bullish for freight rates, with more barrels put in storage, tightening tonnage for the spot markets.

"The initial impact on the tanker markets will be positive – cheap oil will spur demand. First storage will be in play as the money is better for owners there, then will come higher rates for spot voyages," said a shipbroker.

Saudi Arabia and Russia last week failed to agree on production cuts, sparking the start of a new price war over market share.

On Sunday, Saudi Aramco announced the deepest ever cuts to official selling prices for its key Asian customers after the OPEC+ deal talks collapsed Friday.

Brent crude futures, which had already lost over 25% in value since late January, dived by up to 31% at the market open to hit $31.27/b, the lowest since early 2016, before regaining some ground to $35.24/b by 1215 GMT.

Deep contango

This has pushed the oil market in a steep contango. This is a structure in which the forward price of oil is above the prompt price, implying weak prompt demand and a growing oversupply, which creates an incentive for storage.

"Daily earnings are low for VLCCs so it's a great time for traders to look into storage," another shipbroker said. "Storage plays are what I reckon the traders would look into first [i.e. when asking about initial impacts]; with bunker prices going down, the market will hold and owners would have better returns, so the tanker market will hold, at least at the beginning."

The cost to charter a VLCC tanker, which can carry up to 2 million barrels of oil, is starting to increase but with the contango widening, floating storage could emerge as more economical, sources said.

"Rates are all up in the air right now," said a trader. "The last done was $38,000/day [for a VLCC]." This compares with levels of around $28,000-$34,000 a day last week, according to S&P Global Platts estimates.

ICE May Brent and ICE June Brent were trading at $35.24/b and $35.88/b respectively at 1213 GMT, which is a contango of 64 cents between the two monthly contracts, and the contango on the forward curve is even steeper looking further out. Last week, the contango on the May and June contracts was around 30 cents.

Contango is normally considered a key indicator of a weakening oil market and oil traders will be looking to hoard oil to deal with these fundamentals.

There are already signs of oil being stored on land and on ships, especially in Asia, as China has been the worst hit by the outbreak, hurting its oil demand.

North Sea impact

The repercussions are also being felt on the North Sea market, home to the world's key physical benchmark, Platts Dated Brent.

The pressure on prices from the news over the weekend comes at a time when the North Sea market was already under pressure from continued US crude arrivals into the region combined with falling demand from European refineries.

The Brent Contracts for Difference – representing the spread between Cash BFOE and Dated Brent – held relatively stable through the weekend, following a sharp value decline through the day Friday.

In the brokered market Monday morning, the March 09-13 CFD was trading at a discount to May Cash BFOE of 36 cents/b, according to broker reports. This is down significantly from a premium of 9 cents/b indicated by broker reports Friday afternoon, but is slightly higher in value than the discount Platts assessed Friday afternoon of 47 cents/b.

The CFD structure is not yet in a contango and remains backwardated, but if weak fundamentals persist this is likely to switch course.

The backwardation of the CFD structure through March has also remained largely unchanged. Platts on Friday assessed March 09-13 34 cents/b higher than March 30-April 03, while broker reports indicated a backwardation of 40 cents/b Monday morning.