Spotlight: The economics for floating crude are not compelling as a contango play, but it is competitive with onshore storage for those who want to avoid prompt sales

This Spotlight from S&P Global Platts Analytics was first published September 30.

Although the pace of global oil stock drawdown is set to slow through November, S&P Global Platts Analytics does not believe the contango needs to steepen excessively, because there are no significant containment issues. However, the forward structure should continue in a solid contango until drawdowns occur sequentially.

We believe short-term floating agreements can be executed at very competitive levels relative to the cost of onshore storage. A three-month time charter agreement could be inked at $20,000-$25,000/day for a VLCC, which equates to 30-35 cents/b/month (excluding the cost of capital and miscellaneous expenses).

At same time, onshore storage typically costs between 35 cents and 45 cents/b/month (plus similar additional costs). This puts the two roughly level pegging, but with more options for the floating alternative from a trading perspective as it offers the flexibility of multiple destinations.

Initially, we perceived a substantial part of the floating volumes built up in the second quarter of 2020 would unload by October, which is consistent with the duration of most of the deals (typically six months starting in April).

Currently, with refinery runs capped by demand, seasonal maintenance and poor cracks, we expect some of the barrels currently afloat could see their deals extended, taking advantage of the weakness in freight and avoiding the hasty sale of the cargoes to clear them.

However, Platts Analytics does not anticipate a huge pick up in fresh floating storage, as the economics are not compelling for the contango play and there are also risks, such as with physical price differentials, which cannot be easily hedged. But for some players with existing deals nearing their end, a short-term extension could make sense when the alternatives are taken into account.

For producers or term barrel holders, the situation may be different and some short-term floating storage might be used, especially when the alternative is selling at distressed prices.Currently, there are three VLCCs of Forties floating around Scotland waiting for instructions, at a time when the physical arbitrage from the North Sea to Asia is closed.