There is little incentive for trading companies to use large ocean-going oil tankers for storage of both crude oil and distillates.
There is little incentive for trading companies to use large ocean-going oil tankers for storage of both crude oil and distillates, based on the current relatively flat forward price curves, tanker rates, bunker costs and huge capital outlays. However, Credit Suisse said in its 2010 market outlook report that offshore tanker storage is expected to be a consistent theme throughout next year.
The amount of oil in tanker storage will remain a moving target due to several financial factors. OPIS reported in mid-November that about 85.35 million bbl of distillates were stored onboard ships, based on a list of ships booked for long-term storage about a month ago. The bank said that the prospect of easy money from storing oil onboard ships to take advantage of the oil price contango has brought more than a few financial players into an arena that is traditionally dominated by major oil companies due to the large capital outlays.
With oil prices hovering around $80/bbl, the cargo alone for a Very Large Crude Carrier costs about $160 million. A VLCC has the capacity to hold about 2 million bbl of oil.
Besides a large capital, the contango price spread for distillates has weakened in the past year due to ample supply, less-than-stellar distillates demand and an excess hydrotreating capacity. The six-month price spread needs to be above $7/bbl to make crude storage profitable, and the same gap needs to be above $20/bbl for gas oil storage. Currently, these forward price gaps are relatively narrower compared with a year ago. The six-month price gap for crude and gas oil are at only $3/bbl and $10/bbl, respectively. While tanker charter rates, bunker costs, and capital costs play a role in a trader\'s decision to store oil on a tanker, the driving factor is the contango in the oil curve.
Nevertheless, there are other reasons tankers are used as storage despite the relatively flat price curves compared with a year ago. In the summer of 2008, the Iranians had 15-20 tankers storing Iranian crude. The two main reasons cited for the oil being stored on tankers were the discrimination against the oil by importers, due to geopolitical tensions; and the lack of a discount for the heavy sour grade.
Other factors to keep the floating storage trend going in 2010 are the projected weak tanker rates for next year, a record new tanker fleet delivery and the phasing out of single-hulled tankers. The combination of moderately improving global oil demand and above-average fleet growth next year should lead to another year of below mid-cycle tanker rates. This should augur well for the use of tankers as storage, because many owners will most likely be more willing to secure a steady stream of cash flow in the form of a long-term storage contract, as opposed to trading their vessels in the traditional tanker market, Credit Suisse said. The forward freight agreement (FFA) market indicates that VLCC rates are expected to average in the low $20,000 per day range next year.
"We note that the FFA market is fairly illiquid and that we expect tanker rates to average about 20% above indicated FFA rates, but the key takeaway is that sentiment is for a very weak tanker market in 2010,\" the bank added. A weak outlook by some owners may lead them to lock up their vessels on long-term storage contracts to avoid having to operate in the spot market in 2010. Additionally, the phasing out of non-double hull vessels may lead to an increased willingness of owners to put their vessels on storage.
Also, with a record number of new crude tankers scheduled for delivery from shipyards in 2010, the bank expects some of this newly delivered tonnage to be used as storage tankers before entering the traditional tanker fleet.