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Tankers: Waning onshore storage avails render floating storage best option

Highlights

Crude overproduction boosts tanker freight on floating storage demand

Bullish tanker freight to stay as stocks build

Floating storage clear alternative to diminishing onshore options

New York — Crude oil storage facilities on land and on water are filling fast amid ongoing overproduction of 10 million b/d, leaving the global tanker market to make up for excess supply.

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"Cuts are nowhere near enough to counter the 20 million b/d demand destruction," Erik Broekhuizen, head of Tanker Research & Consulting at Poten & Partners said in a webinar Friday. Crude tanker rates are expected to remain strong until oil demand surpasses output and a destocking cycle begins, he explained.

OPEC expects global oil pandemic demand destruction of 6.8 million b/d year on year in 2020 to 92.82 million b/d, with April seeing the largest downturn at about 20 million b/d, according to its latest monthly oil market report.

Large tankers such as the VLCCs and the Suezmaxes in the dirty sector and the Long Range 1 and Long Range 2 tankers on the clean side have benefited the most due to floating storage demand and they are expected to remain strong as long as stocks are building.

"As storage capacity fills up onshore, tankers are the last resort," Broekhuizen said. "Tanker rates will be high and volatile as long as the oil market is oversupplied, which we expect throughout the second quarter of this year.

BULLISH TANKER FREIGHT TO STAY AS STOCKS BUILD

An ever-deepening crude contango structure has led to a soaring VLCC market, as charterer interest in floating storage and spot voyage charters for the carriage of cheap crude barrels has created a run on global tonnage.

Freight for the 270,000 mt US Gulf Coast-China voyage is currently 93% higher than March 9, the day that global crude prices saw an initial drop following news of the failure of OPEC+ to reach a production cut agreement, S&P Global Platts data shows.

The cost of the USGC-China voyage was last assessed Friday at lump sum $13.5 million, unchanged on the day.

Rates have hovered above the $11.5 million level since mid-March, reaching as high as $19.75 million on April 1, only assessed higher on October 14 at $21 million after US sanctions on Cosco Shipping on September 25 shorted global VLCC tonnage by close to 5%.

The Suezmax market has seen a knock-on effect from VLCC volatility, with freight for the 130,000 mt USGC-Singapore route rising 32% from the March 9 milestone, last assessed at $5.8 million.

Currently 54 VLCCs holding 2 million barrels each and 25 Suezmaxes with 1 million barrels each or close to 7% and 5% of the global fleet in each segment are used for floating storage counting ships that have been stationary for more than 20 days, according to Brockhuizen referring to Lloyds data.

Between 10% and 15% of the globally available tanker tonnage could accommodate 300 million barrels of crude and 100 million barrels of clean products, according to estimates by S&P Global Platts Analytics.

According to Broekhuizen 500 million barrels of floating storage could be filled within a month with overall overproduction of 10 million b/d.

FLOATING VS ONSHORE STORAGE PAYOFF

Floating storage rates were last talked Friday morning around $55,000/d-$57,500/d for Suezmaxes for a six-month period charter and $86,000/d for VLCCs for the same period.

The NYMEX WTI crude contango structure more than pays off for floating and onshore storage costs; however, waning availability at onshore storage facilities could prompt further floating storage interest.

"Everyone is freaking out because storage at Cushing is filling up, but the floating storage is still there and available," a shipbroker said.

The NYMEX WTI May carry between the first- and sixth-month contracts settled at $14.96/b Friday, a payoff of around $110.70/mt, while floating storage costs would be approximately $57.33/mt for six-months storage on a VLCC and about $66/mt for a Suezmax.

Current crude storage costs at Cushing are about 60 cents/b per month for 12-18 month terms and nearing $1/b per month for short-term six-month contracts, according to Ernie Barsamian, CEO of Tank Tiger, a tank storage clearinghouse.

Hence for a sixth-month term floating storage fees range close to $12/mt and $22/mt over onshore fees at Cushing, before the $3/b it costs for walk-up shippers to move light sweet barrels of crude from the Enterprise Katy facility in Fort Bend County, Texas, to Cushing, when Enterprise Products Partners plans to move crude oil on an existing pipeline from May 1, in order to meet growing demand to store oil at inland facilities.

"While promptish availability of storage in Cushing is limited at this time, we are showing 3Q 2020 storage," Barsamian said. "Traders are reluctant to pounce on future storage, since the contango flattens out considerably down the curve. However, with this inventory overhang, it will take several months to see an inventory drawdown. As a result, the giant front-loaded contango will likely roll from month to month which will make the 3Q storage very attractive."