Shipowners dreamt last night of being paid to bunker their ships as the most extraordinary plummet in oil prices in history saw the NYMEX May WTI ending yesterday at minus $37.63 per barrel. Crude has become so cheap, and storage options so full, that for the first time in history producers were literally giving away black gold.
The dramatic drop in prices – down by $55.90 from Friday – has enormous ramifications for floating storage and the length of the bull run on the tanker trades.
Brokers Lorentzen & Stemoco noted this morning: “The irrational selling yesterday reveals the frailty of US oil, with production vastly exceeding demand and remaining storage capacity onshore lacking.”
Lorentzen & Stemoco said tanker owners ought to take two lessons onboard from the plunging oil prices.
“First, that the contango for WTI has turned extreme with traders scrambling to find storage opportunities offshore as floating oil onboard VLCCs and Suezmax tankers. Second, that the NYMEX June WTI contract of US$ 20.43 bbl is priced lower than Brent Crude (ICE) of US$ 25.23 bbl for the comparable month, to a large degree exposing the freight element,” the broker observed.
According to the broker, traders can make money storing floating oil on VLCCs for six-month contracts at over $70,000 per day and 12-month contracts at about $45,000 per day.
A report from Friday by tanker brokerage Gibson predicted: “A huge stock build is inevitable over the coming quarter and despite more storage capacity being made available via SPRs, floating storage will be inevitable. This floating storage demand is likely to be the main pillar of support for the tanker market.”
Traders are already storing an estimated record 160m barrels of oil on ships – double the level from two weeks ago. Splash estimates there are around 60 VLCCs now being used for storage, and 30 suezmaxes, as well as an increasing number of aframaxes.
Traders are seeking ships fast as storage options on land dry up. The International Energy Agency (IEA) is forecasting a 12m barrels per day stock build in the first half of the year, which could overwhelm onshore storage within six weeks.
“The oversupply will likely resort to floating storage in the coming few months, providing support to current tanker charter rates,” brokers Braemar ACM noted in a recent research report.
“This is an unprecedented time in the history of tankers and while VLCC tanker storage is garnering the headlines, smaller crude and product tankers are also being used for storage,” Gregory Lewis, a shipping analyst with global financial services group BTIG, said in a recent note.