The standoff between Russia and Saudi Arabia on oil production shows no sign of ending soon, however prices for crude picked up today after suffering their greatest one-day plunge for nearly 30 years on Monday.
Brent crude rebounded 5% to $36 a barrel on Tuesday, while the US marker West Texas Intermediate rose to $33.
Nevertheless, with the price of Texan crude still cheaper than the actual barrel it comes in, most tanker analysts are predicting a swift rise in demand for floating storage.
In a note to clients yesterday, New York-based Poten suggested: “Increasing oil supply at significantly lower prices in a market with weak demand fundamentals should lead to an increase in demand for floating storage. That is indeed happening. We are seeing several deals being negotiated for short-term (6-12 months) charters, with one already concluded. The fall in oil prices has made floating storage more attractive, although the margins are still relatively thin.”
Amid a flurry of tanker-related reports published yesterday, Jonathan Chappell, an analyst at Evercore ISI, suggested that tanker shares were set to soar based on a precedent set the last time OPEC members ramped production five years ago.
“We already have a recent playbook for how these developments may unfold, from November 2014 through 4Q15, the last time OPEC pursued a free-for-all production plan. Demand for tankers jumped, which along with the removal of ships from the trading fleet for floating storage associated with a deep contango price structure in the oil market, resulted in the strongest spot rates since the financial crisis and massive share-price outperformance for tanker stocks,” Chappell pointed out.
Cleaves Securities was more circumspect, warning that uncompetitive US exports could hurt tonne-mile demand.
“Increased supply of oil could have positive near-term impact on tanker earnings from transportation and storage economics, but negative medium-term implications as lower energy prices leads to less E&P in the US which a very tonne-mile intensive trade,” Cleaves noted in its latest weekly report yesterday, pointing out that there is strong correlation – R²=0.93 – between the WTI and US rig count with a 16-week lag.
“The rout in oil prices has led to a developing storage story for large crude oil tankers, for the first time in a long time. Given the current steep contango in the Brent oil futures curve, a VLCC could theoretically earn $79,127/d for one year by storing crude. Given the latest quoted one-year timecharter rate for a VLCC at $30,000/d, on oil trader could theoretically lock in a one-year profit of $16.4m in today’s market. Although these numbers are theoretical, there is undoubtfully a massive potential for profit in today’s market from using large crude oil tankers to store oil. This will likely support oil tanker earnings, all-else-equal,” Cleaves predicted.