London — Oil on floating storage is now at its highest level in the history of the oil market and despite modest signs of a demand recovery, industry sources and analysts say the peak for these volumes is still some way off.
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There are some signs that oil is starting to improve based on global road traffic and congestion data as travel restrictions start to ease. But looking at the amount of oil on water on a real time ship tracking platform, there are many signs that the imbalance of supply and demand remains very skewed.
There are currently more than 200 million barrels of oil and products on floating storage, representing around 5% of global carrying capacity, according to data from S&P Global Platts trade flow software cFlow.
Around 10-20% of the global tanker fleet represents a reasonable ceiling for floating storage, which would allow the storage of around 400 million-800 million barrels of crude and products, according to Platts Analytics.
Energy research firm Kpler estimates that floating storage volumes were as high at 180 million barrels for the week beginning May 11, making it the largest ever volumes for oil on floating storage.
This is a rise of almost 95% in the past two months, as data showed that floating volumes of crude and oil products were as high as 92.09 mill barrels for the week beginning March 9. The data includes volume of commodities on tankers that are idled offshore for seven days or more.
"Floating volumes are likely to keep going up in the next few months as many vessels that were recently fixed on floating storage are still sailing to their destinations or in some cases have not been loaded," Erik Broekhuizen, head of Tanker Research & Consulting at Poten & Partners, said recently during a webinar.
But there are some signs that oil on water is beginning to decline as production cuts from OPEC+ along with involuntary production cuts from the US, Canada, Brazil and Norway start to come into play.
Oil on water, which includes the total volume of crude and products on tankers, was estimated to be around 1.25 billion barrels for the week beginning May 11, from 1.30 billion barrels the previous week.
Shipping sources remain skeptical about whether oil on water will start to fall unless demand does start to rise steadily and more production cuts are enacted. And, looking at the tanker market, sources say it could be a long time before any balance is close to being found.
"Oil going on water is still set to increase given the overproduction compared to current demand," said Paul Marsh, research director at Navig8 said during a webinar.
"How long it will take to unwind oil from ships is a million dollar-question," he said. "There are widely diverging views about when this is set to happen, but it will surely take more time to offload storage than it took to build it. This could be anywhere between one and two years, maybe more."
Shipping sources noted that despite a slight fall in crude cargo inquiries, freight rates for VLCC and Suezmax tankers had found some support from time charter bookings
With so many tankers booked on time charter, the tonnage list on the spot market has tightening considerably, pushing up freight.
"New ships are being booked on time charter given the overproduction, although the rate has slowed, a shipbroker said.
He said demand for West African crude still remained particularly lackluster. "The spot market is looking bleak in the long term given the low demand," he said. "We are seeing a number of cargoes unsold in June, which would mean more vessels would go on storage."
During the floating storage rush at the end of March, time charter bookings for short periods of around six months were estimated at around $120,000/day for VLCCs, and periods up to one year at around $85,000/day.
Ship owners are continuing to ask for expensive rates despite weaker spot market. This week, VLCC daily earnings for spot fixtures were estimated at around $55,000/day, according to Marsh.
Pace of recovery
Production cuts from OPEC and its allies came into place this month and with hefty involuntary shut-ins from producers in the US, Canada, Brazil and Norway, supply is beginning to fall.
But demand remains in the doldrums and despite slight improvements, the fundamentals remain far from ideal.
The International Energy Agency continued to call on oil producers to do more to contain the impact of the coronavirus on the oil markets.
"Demand will not jump from one day back to levels we had before the crisis and we still have a huge amount of surplus and plus a lot of floating oil around the world, so therefore one needs to be very careful if one doesn't want to change," the IEA's executive director Fatih Birol said during a webinar.
Platts Analytics said the fall in production so far this month had helped to avert an inland storage crisis and that $25-30/b was a fair value for Dated Brent for the coming months.
"The current supply losses, OPEC's determination, and trend towards opening up point to stronger oil prices than we believed earlier," it said in a note. "[But] we are not overly bullish as much anxiety persists, particularly around demand and the impact of opening up from lockdowns on the infection rate."