Oil tanker demand booms as traders wait out cheap oil
More and more tankers being used to store excess crude until it can be sold at higher price
The sudden plunge in oil prices has prompted some enterprising traders to get creative, storing their temporarily cheap oil in idle container ships until prices rebound.
According to data compiled by Reuters, supertankers capable of storing 25 million barrels of oil have been booked in recent days by oil traders looking for a place to park their product and wait out low prices.
It's a strategy the world last saw in 2009, when plunging oil prices led to as many as 100 million barrels of oil being held in what's known as "floating storage" — sitting in an oil tanker offshore, with no immediate plans to deliver it anywhere.
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At least 11 large crude containers (known as VLCCs) have been booked this week, Reuters reports, a figure that's up from five last week. A VLCC is a vessel that can hold at least two million barrels of oil, so there are theoretically as many as 22 million barrels of oil sitting in those 11 vessels.
For comparison purposes, Canada exports about three million barrels a day, so those tankers could be holding about as much oil as this country produces in a week. And there's space for a lot more.
It's a gamble, but it might pay off down the line. The price of oil that gets quoted in the media every day is actually what's known as an oil futures contract — an agreement to deliver a certain amount of oil at a certain time, for a certain price.
Oil market 'in contango'
Right now, the dominant contract is the one for delivery in February 2015. On Wednesday, the price of that oil was about $45.84 US, pretty much unchanged on the day, but down by more than half from the July price of $105. (The spot price — the price it would cost to buy a barrel and use it today — is lower still, at around $42 in some parts of North America.)
When the spot price is lower than the current future price, it's known as being "in contango," a phenomenon that traders have been seeing since November. As Evercore shipping analyst Jonathan Chappell put it in a recent research note, "the contango has steepened substantially over the last few trading days, bringing this potential trade back into the black."
The February contract is dominant at the moment, but there are other oil contracts trading, and the farther they go into the future, the higher the price.
The August 2016 contract, for example, is trading Wednesday for $57.82 a barrel — almost $12 a barrel higher than the more imminent contract. That's a sign the market thinks the oil price will go back up over time, but it's also a money-making opportunity for anyone who can buy cheap oil today, store it for a year and a half, and then pocket the difference.
That's what happened last time oil prices dropped this much. From the start of 2009 to April 2010, "the average number of ships used for floating storage … was 114," Chappell said. That was driven by oil traders looking for a place to park their oil until the price came back up.
That's not to say such bets are cheap or easy. The daily price to rent a massive tanker is up to around $84,000 today. That's well up from $63,000 a few months ago, but still below levels seen before the recession of 2008, when prices above $100,000 were the norm.
Shippers offer discounts if you book several days in a row, but even a three-month contract would cost $38,000 per day. At that rate, for about 500 days, plus the cost of insurance, the strategy would cost more than $1 million per tanker. So it's a big bet that there's enough money to be made down the line to make it worthwhile.
Clearly, some people like the odds.
"Should this widening contango trend continue, we expect more interest for hiring VLCCs as floating storage," analyst Omar Nokta of Clarkson Capital Market told Reuters.
Bloomberg data shows the floating storage capacity off the U.S. Gulf Coast has increased by 45 per cent or more than 2.7 million barrels in recent days. But it's not just an offshore phenomenon.
Just as the shale oil boom has blown away America's oil output, storage tank capacity in the U.S. has also expanded, up by more than a third since 2010. And even in a world that's seemingly awash in oil, those tanks are barely a third full: the most recent U.S. inventory data shows there's less than 150 million barrels being stored in the U.S., out of a total storage potential of almost 440 million.
"It's a great bet," one trader who was trying to secure storage space in the oil hub of Cushing, Okla., told Reuters. Ordinarily, Cushing can hold about 80 million barrels, and there are currently only about 40 million in storage there, so there's an opportunity to profit from an inefficiency in the market.
"We're at an inflection point," said Philip K. Verlerger, an economist who has watched the oil market for three decades. "Prices can stay at these levels as storage fills, but if demand doesn't pick up or supply go down, then prices will fall again."
With files from Bloomberg and Reuters