The storage of an estimated 80 million barrels of crude oil on-board VLCCs is proving a decisive factor in current crude oil prices.
The storage of an estimated 80 million barrels of crude oil on-board VLCCs is proving a decisive factor in current crude oil prices and the spread between near and long term future prices.
?The amount of crude being stored on VLCCs currently is immense enough to weigh in heavily on prices,? a Singapore-based crude futures trader told.
?Already on-shore storage volumes are effectively pressing prices down. I don't see any significant increase [in crude oil prices] until this bulk of floating storage is cleared-off.?
?It makes sense anyway because the charterers of these VLCCs are holding on to the crude for sale at a much better price,? he added.
Storage on VLCCs became attractive from late last year with near-term futures contracts cheaper than contracts further into the future.
Latest reports indicate that more than 35 VLCCs have been booked to store crude and some players are estimating that up to 80 million barrels of crude are either being moved to land-based storage aboard a supertanker or already locked in floating storage.
An oil consultant said in December that the present contango was the biggest for a 12-month span of futures since 1998.
Such a deep forward discount reflects a supply surplus in the market, and now players are saying that the amount of crude taken into floating storage has built up to such an extent as to prevent a permanent narrowing of that discount.
?You can almost describe it as an accordion effect,? a senior executive at a New York energy brokerage was quoted saying. ?For floating storage to come out you want to see these spreads tighten up. When the oil comes out...(the spreads) widen.?
?This floating storage is now among the biggest impediments to oil prices recovering any of the ground lost over the last six months,? said another source.
?Companies are quick to sell cargoes at the hint of a turnaround in the oil market, unleashing a flood of oil onto a near-saturated landscape,? reported Dow Jones.
And these ?barrels at sea present OPEC's real challenge,? said Michael Wittner, global head of oil research at Societe Generale, refering to the oil producing cartel's attempts to cut supply and push up prices.
According to Wittner, ?the tankers can be sold wherever supplies begin to tighten, countering OPEC's intentions and preventing any flattening of the futures market curve.?
OPEC's cuts have so far not resulted in lower inventories. US crude oil stocks continued to increase last week and are now 17% higher than this time last year, according to weekly data released by the Department of Energy (DOE) on Wednesday.
Though stocks are not at a record in the US or worldwide, Wittner believes they approach all-time highs once floating storage is factored in.
OPEC members however have reportedly been gaining ground in terms of effecting their pledged cuts and some have proposed even deeper cuts soon if stockpiles remain un-depleted and prices stay low.
?OPEC will eventually win the battle, but what floating storage does is it delays the victory,? Wittner was quoted saying.