Fewer tankers to store oil as contango narrows.
The number of tankers storing gasoil and other clean petroleum products is set to drop sharply over the next couple of months as the price contango of oil products narrows further, putting pressure on freight rates as ships re-enter the spot market.
With the spread between future gasoil contracts continuing to flatten it has become almost impossible for oil traders to make a profit.
Consequently, few vessels are expected to be chartered for storage in the short term while those actively employed in this area are likely to redeliver cargoes when contracts expire, taking away the safety net that owners operating ships in the spot market have come to rely on.
?The contango on the face of it has narrowed to such an extent that it does not look like it is profitable for anyone to take any more storage employment at the moment,? ICAP Shipping head of tanker research Simon Chattrabhuti said.
?It has already come off substantially, from around 90m barrels to approximately 70m barrels in the last two months.?
Around 30 vessels have already been redelivered during January and February, with the volume of CPP stored at sea dropping by over 2m tonnes over the two months, data from ICAP shows.
At the beginning of March only 86 ships were storing CPP on short term contracts, down from 116 vessels in mid-January.
Accordingly the volume has dropped from 89.4m barrels, or 11.76m tonnes, in January to 71.3m barrels, or 9.4m tonnes, at the start of this month.
?The demand [for gasoil] is there and refineries are in maintenance and in theory stores should be drawn down, which stacks up with the evidence we are seeing of ships being redelivered and the flatter forward curve,? Mr Chattrabhuti said.
The contango, in this case the three month price spread of future gasoil contracts, had been in excess of $6 per tonne per month since late 2008 and at these price differentials had made it profitable for traders to store the fuel.
?Now it has got much narrower, down to just $3.25 over months one to three, so less than $2 average over the front three months, so it would seem that there is no way you could make a profit out of storage,? he said.
?Obviously you need a certain differential between the months to make it profitable once you include the cost of capital, insurance, and then the biggest cost of all, which is the charter of the ship.?
The gasoil contango has narrowed from $20.75 per tonne over the front three months at the start of November 2009, when floating storage volumes were thought to be at a record high, to just $3.25 last Friday.
The sector most impacted by opportunistic traders not employing vessels is the long range two product tanker market, which represents almost half of all ships chartered for CPP floating storage.
ICAP figures show 53 vessels in this size range, of 80,000 dwt-120,000 dwt, were storing CPP in January, but this had fallen to 41 ships in early March.
?For the LR2s that is a large proportion of the coated LR2 fleet. There"s about 200 coated LR2s in total, so 53 was over 25% of the fleet that were storing and now it"s down to about 20%,? Mr Chattrabhuti said.
With more ships competing for cargoes, time charter equivalent earnings on the LR2 benchmark route from the Middle East Gulf to Japan have dropped over 35% in the last six weeks alone, to $11,000 per day.