Asian LSFO traders hunt for storage space as oil dives deep into contango

Singapore — Singapore-based oil traders have been looking to store crude in tankers since the start of the year, as a widening contango makes large-scale storage profitable in a market marred by languishing demand and a supply glut, shipping sources told S&P Global Platts.

The allure to store crude at price levels that are nearly 50% lower since the start of 2020 is the result of a widening contango market structure, which allows traders to lock-in gains by buying oil now and selling it at a later delivery date, as long as the storage costs are low enough.

There are companies that have hitherto been stockpiling low sulfur fuel oil material, both on landed tanks and on floaters in and around Singapore, to meet demand from the International Maritime Organization's mandate to limit sulfur to a maximum 0.5% for marine fuel from January 1, 2020.

"We have looked at doing it. It's a good trade if you can make it happen," a Singapore-based fuel oil trader at a western trading company said.

The contango at the front of the ICE Brent futures curve has widened to average $2.22/b so far in April as compared to the March average of $1.52/b, or $16.27/mt and $11.14/mt, Platts data showed.

Meanwhile, during the same period, the outright value of front month ICE Brent futures have dropped to average $30.64/b, or 11.5% lower from the March average of $34.62/b, data showed.

"In theory, it makes perfect sense," said the fuel oil trader.

The development comes amid a setting where suppliers and traders of IMO-complaint marine fuel have already been resorting to store product due to a sharp drop in flat price coupled with a demand slump, a move also facilitated by a steepening contango in the low sulfur fuel oil market.

The contango at the front of the Singapore Marine Fuel 0.5% swaps curve has widened to average $8.89/mt so far in April from the March average of $5.11/mt. During the same period, the outright value of Singapore Marine Fuel 0.5% cargo has dropped 19.44% to average $233.74/mt so far in April as compared to the March average of $290.17/mt, Platts data showed.

"[It] makes sense since the crude contango right now is more than the LSFO contango," another Singapore-based fuel oil trader said.

With crude oil vying with marine fuels for storage space, there has been a surge in inquiries over the past few weeks to charter vessels, said market sources.

"We've received quite a few requests, in the last 2-3 weeks, for crude and fuel oil, although we've had to turn them down as we've got long-term leaseholders already using our vessels," said one shipowner with two vessels for floating storage.

Several market sources have in fact said that either Vitol or Glencore or the two companies have co-leased the 3 million barrel ultra-large crude carrier "Europe" to store crude.

Spokesmen at both Vitol and Glencore declined comment saying the companies were not allowed to comment on its trading activities.

"May be Vitol is now using [Europe] to store crude. It's a lot better than storing [marine fuel] 0.5," said the first trader.

The super tanker, along with "Oceania," the only other ULCC in the world, both of which are owned by Antwerp-headquartered oil shipping and storage services company Euronav, arrived in waters off Singapore last year, and have been used to store predominantly low sulfur material for the marine fuel 0.5% market.

"Many of the floaters should be taken on to do crude. We hear some in the market, but ships are limited. [Vitol] is still looking for ships, but nothing firm yet," said a source close to Vitol, and with direct knowledge of the matter.

High charter rate, short tenure, a deterrent

A surge in cost to charter a vessel and the relatively short duration that one may be able to charter the vessel for, coupled with the uncertainty around when oil demand may rebound were some of deterring factors though, said traders.

The cost to charter a very large crude carrier for three months has shot up to $80,000-$90,000/day, from $30,000-$40,000/day at the start of the year, shipping sources have said.

"The main question is for how long can you get the vessel for. It's now the [ship] owners' market, so not sure if you can have long term contracts. At least with fuel you can look for a home, but not quite the same if you're holding crude at the end of three months," said another trader.

Meanwhile, given the abundance of LSFO currently stockpiled on landed tanks and on floaters in and around Singapore due to sluggish demand, the task of replacing LSFO in storage with crude oil is more than just an operational issue, said traders.

"Turning out a VLCC full of LSFO and substituting it with crude oil is no easy thing, especially when the LSFO market is doing quite badly right now," said another fuel oil trader.