Oil Traders Look to the Sea for Profit Amid Price Collapse

By Ben Sharples and Naomi Christie

(Bloomberg) — The international oil glut might quickly increase to the ocean.

While merchants are already cashing in on the excess by housing oil in onshore tanks throughout the globe — together with on the tiny Caribbean island of St. Lucia– increasing the storage to tankers at sea might close to a degree the place it turns into worthwhile, in keeping with Citigroup Inc., Goldman Sachs Group Inc. and IHS Maritime & Trade. A construction known as contango, when the value of a commodity to be delivered sooner or later is larger than if it was offered right now, has been transferring in the correct route.

Vessels laden with oil, parked offshore from Singapore to the Gulf of Mexico, grew to become a function after the worldwide monetary disaster because the widening contango allowed merchants with entry to storage to lock in a revenue. As the unfold expanded once more amid a world provide glut, tanker proprietor Frontline Ltd. fielded inquiries final month about choices to deal with crude at sea.

“Even though the contango is not wide enough yet, it could become so if OPEC continues to overproduce relative to demand,” Frode Moerkedal, an analyst at Clarksons Platou Securities, stated by e-mail.

With the Organization of Petroleum Exporting Countries already pumping above its 30-million-barrel-a-day quota for greater than a yr, Iran’s plans to spice up output after sanctions are lifted threaten to worsen the oversupply — a market situation that usually deepens a contango. That might see extra oil saved at sea throughout the fourth quarter, in keeping with Andrew Scorer, an analyst at IHS Maritime & Trade.

The revenue alternative requires a little bit additional steepening of the Brent ahead curve at present freight charges, Goldman stated in a Sept. 11 report. The widening unfold is bringing the potential of floating storage “back into play,” Citigroup stated this month.

The unfold would want to widen to $4 a barrel throughout a three-month interval for storage to be viable, in keeping with estimates by E.A. Gibson Shipbrokers Ltd. on Sept. 23. Brent crude for November settlement was at a $2.08 low cost to the February contract on the London-based ICE Futures Europe trade at 11:52 a.m. in Hong Kong.

“Once Iranian crude is out in the market, then it might start affecting spot prices for crude oil, which could eventually open up the contango again,” Nikhil Jain, an analyst at Drewry Shipping in New Delhi, stated by cellphone. The unfold throughout a three-month interval wants to succeed in about $3.30 a barrel earlier than floating storage would work, he stated.

As Frontline takes calls on storage choices, Paddy Rodgers, the CEO of Euronav, one of many world’s largest house owners of oil supertankers, sees crude being housed at sea over the following 4 to 5 months. The enhance in floating storage might also tighten the transport market and increase freight charges, in keeping with Scorer from IHS.

Junk Ship

Daily charges to rent very massive crude carriers on the benchmark Middle East to East Asia route rose 0.3 % to $70,098 a day on Sept. 25, in keeping with Baltic Exchange information. That’s down 26 % from the height in July this yr. Rates will common $54,112 in 2015, in keeping with a Bloomberg survey of transport analysts.

While forecasters see favorable situations for the offshore contango commerce nearing, floating storage bookings are returning to the oil market, in keeping with Clarksons. The demand can even present a lift to the world’s largest tanking corporations together with Vopak NV and Kinder Morgan Inc.

GMS Inc., higher often called a recycler of ships, chartered its first oil tanker that was used for floating storage inside the final 12 months, in keeping with Chief Executive Officer Anil Sharma. Purchased in 2014, the vessel was leased to a buyer that used the ship home crude within the Middle East. The cargo has since been discharged within the Far East.

“It’s more of a black swan event,” stated Sharma, who based the corporate in 1992. “It’s not something that’s easy to replicate. You have to be lucky, you have to be in the right place at the right time.”