Crude price fall points to storage boom
The fall in crude oil prices could bring a business boom for the world’s independent storage operators, and for traders leasing tankers for floating storage
Crude oil prices have moved into contango - prices for future delivery being higher than prompt - and the contango is forecast to widen to the point at which it will exceed storage costs.
At the end of December the price of Brent crude to be delivered in February was nearly $4/barrel below the price for delivery in July - the widest contango the crude market has seen since the world recession of 2008-09. The six-month contango - February Brent compared with August Brent - is wider, at $5.50/barrel. In 2008-09 the six-month contango was above $10/barrel, substantially exceeding the cost of storage.
Storage in a land terminal in Singapore or Rotterdam costs about $4.50 a cubic metre per month at present, equivalent to about $4.30/barrel for six months (see Petroleum Economist’s annual storage survey in the December-January issue). Traders will probably want a six-month contango of $6-$7/barrel, to cover the storage fee together with finance and insurance, and to provide a profit.
In 2008-09 large volumes of crude went into floating storage in tankers, but tanker costs were lower then than now. At end-December, the charter rate for a tanker of very large crude carrier (VLCC) size was about $60,000/day, pointing to a storage cost of about $5.40/barrel for six months if the ship is fully loaded. However, day-rates are forecast to decline from their present seasonal high - for much of last year VLCCs could be chartered for $30,000/day or less, indicating a six-months storage cost of well under $3/barrel.
Estimates of the volume of crude held in floating storage in 2008-09 extended from 50 million barrels to twice that amount - enough to fill 25-50 VLCCs. However, it seems unlikely that such a large number of VLCCs could be moved into floating storage now. Shipping analysts say the tanker market is much more in balance now than in 2008-09: while that price fall was the result of declining demand for crude in the world recession, the present price fall is mainly the result of rising production, so demand for tankers is relatively high.
According to the International Energy Agency, the surplus of production over likely demand in the first half of 2015 will lead to world inventories of oil increasing by 300m barrels. Although some countries, particularly China and India, are likely to buy to increase their strategic stocks, most of the increase will have to find a home in commercial storage tanks.