Last week, the International Energy Agency, which advises the OECD countries on energy policy, said that the oil market was “massively oversupplied”. In its monthly report, the IEA observed that global oil supply had grown by 550,000 barrels a day in June, to 96.6mb/d, up from 3.1m at the same time a year ago. The agency added that: “The market’s ability to absorb that oversupply is unlikely to last. Onshore storage space is limited. So is the tanker fleet… something has to give.”
Constant supply growth from North America has been one of the reasons that there is a growing oversupply of crude oil, above ground. Since May, supply growth has stayed level, and is forecast to slow to 900,000 barrels per day in 2015, and 300,000 barrels in 2016. Until last week, the IEA expected non-OPEC supply growth to slow to 1m barrels per day this year, and stay flat in 2016, as lower oil prices and spending cuts took hold. That was probably a valid assumption until the Iran nuclear deal of this week. As part of that deal, most restrictions and sanctions on Iranian crude oil exports will be lifted, certainly by the end of next year. I’m willing to bet that the deal will go through, at least to the extent of oil sanctions being relaxed. I’m also willing to bet that the members of OPEC will continue to pump at near record levels; OPEC’s crude production reached a three-year high in June, to 31.7m barrels per day, up 340,000 b/d from May. For most shipping investors this means much more oil contango.
A contango, in the language of commodity dealers, is a series of prices for future delivery of that commodity, that increases over time. That’s the official story, but it isn’t the whole truth. In the case of crude, as I have just discussed, prices in the recent past, and today, are higher than they are likely to be for future delivery. Normally, if refiners need oil a few months in advance, it does not make sense to leave the stuff in the ground, rather then pay financing and storage costs.
The problem is that more and more crude is out of the ground. It has to go somewhere, even when prices are low.
What’s driving up production is the ‘rainy day’ factor. Interest rates are low, and producers in the US and elsewhere, together with national oil companies, need to keep up their output, to protect market share. After the sharp drop in oil prices last year, some 40 VLCCs were put on one-year time charters for use as floating storage. Another 50 or so newbuilds will be delivered next year, with more on the way.
With Iran apparently coming back to the market, we may see another sharp drop in price before the end of 2015. The problem is that tankers under time charter cost about $1 per barrel per month, to store crude. Even if the demand for gasoline continue to grow in the US, and in the rest of the world, the lure of fast money may well lead to an over commitment to the ‘cash and carry trade’. A growing market for oil storage does not necessarily translate into a tanker boom.
Since I am offering to place a wager or two, I will say that the tanker market recovery is temporary. Moreover, I am not particularly thrilled that private equity funds are basing their investments in tankers and their owners on the belief that the growing market for floating oil storage is here for years to come.