Tanks, gluts and contangos
A rush on storage capacity to deal with oil’s excess is buoying storage rates, from Rotterdam to Cushing and beyond
Oversupply of crude and contango in the forward curve have offered handsome rewards to anyone with capacity to stash oil. It’s been a bonanza period for storage owners.
Stocks have built and built. Total commercial crude inventories in rich nations surged again in January, rising by more than 20m barrels to 3.034bn, according to the International Energy Agency. It left levels at 338m barrels, or about 10%, above their normal range for that time of year and almost 270m barrels higher than during the same period of 2015. It means more than 0.7m barrels a day poured straight into OECD tank farms over the 12 months.
Investors in the biggest storage firms have reaped the rewards. Most storage facilities are owned by unlisted private firms or branches of oil companies, and many don’t disclose information on inventory levels, available capacity or the rates they charge customers to lease their tanks.
While big upstream companies have struggled, the profits for storage firms like Vopak have been rising steadily. The Dutch company owns almost 35m cubic metres (cm) of storage tanks across 74 terminals globally. In 2014, 88% of its storage capacity was leased out. Last year, utilisation reached 92%. Net profits for 2015 jumped by 11%, to €325m.
But the financial performance of these firms doesn’t tell the whole global storage sector story. Marked differences exist between the products-storage market and that for crude oil; and between the regions.
In Europe, the glut is in products; in the US, predominately in crude; and in Asia levels are high for both. The global oil glut is ever shifting, but doesn’t look likely to end any time soon.
Start with Europe. Products, rather than crude, are seeing the most marked oversupply – an outcome brought about by surging US gasoline demand last year. As American drivers took to the road, European refiners ramped up throughput to take advantage of 12-year-high gasoline margins. But along with gasoline throughput came products like diesel and jet fuel, for which demand was not as strong. There was little else to do with these excess products than put them in storage.
A case of fundamentals
The market structure helped spur this storage trade. The contango - which is making cargoes to be delivered in a few months pricier than spot ones - on Ice’s low-sulphur-gasoil contract (used to price products like jet fuel and diesel) was much steeper than that for Brent. For example, to cover the cost of storing crude and products in the Flushing, Amsterdam, Rotterdam and Antwerp trading hub, traders need the price increase between the front, second and third months of the contract to be around $0.50-1.00 a barrel, says Dominic Haywood, an analyst at market consultancy Energy Aspects. In early March, this spread was just $1.18/b for Brent, making the trade barely profitable. For the low-sulphur-gasoil contract it was about $9.50/b – a juicy profit for anyone able to buy, store and wait for the futures curve to reward him.
Other factors have also buoyed European products stocks. Mild winter weather has dampened demand for heating fuels. Refinery run rates have remained stubbornly high as European refiners sop up cheap crude from suppliers including the Middle East and North Africa. And traders looking to take advantage of the contango conditions are importing all the product they can get their hands on. Diesel and gasoil inventories at the Amsterdam-Rotterdam-Antwerp trading hub hit a record high of 6.3m tonnes in mid-December. Recent draws have clawed back some spare capacity, but at the end of February the hub still held almost 5.8m tonnes, well above average, according to market-intelligence firm Genscape.
The urge to store doesn’t seem to be ending. Storage-owner sources say traders are particularly keen to find capacity to hold jet fuel, supplies of which continue to outpace demand. Storage capacity has been taken on one-to-three year contracts, implying traders don’t expect that glut to clear imminently either.
Prices to store refined products vary across Europe, depending on proximity to end-buyers, the volumes of oil product to be stored and the negotiating skills of the traders. But cheap deals are hard to come by.
Storage owners keep their fees confidential. But sources in the business say the highest costs in Europe right now are in Rotterdam, and average around $3.50 per cm per month (equivalent to $0.55/b). Rotterdam is well connected to inland markets in continental Europe. Storing oil products in Antwerp costs around $3-3.50/cm per month and facilities in Flushing and Ghent typically charge around $0.25-0.30/b less than that.
These prices are around the same rates as last year, but there is less available tank space. So prices could rise further. A source at one large storage owner says that if new capacity became available his company would hike prices by 20-25%. Demand is high – and as long as the futures curve remains in contango, the market would bear the cost. “Everyone you talk to just wants to have more storage. Over the longer-term we’re confident there’s enough demand to keep it profitable.” Backwardation – a reversal of the contango, which would make future contracts cheaper than spot ones, immediately ending the storage play – is on no one’s lips for now.
The search for storage
Such is the faith in the contango’s persistence that other storage owners talk of repurposing unused oil tanks to add yet more product-storage capacity. “Crude (storage) economics don’t stand up at the moment but for clean products they do,” says one. “We’ve got some crude oil tankage we’ve been trying to convert to clean-product tanks. Everyone keeps asking for more tanks so we’re just trying to get as many as possible on line as fast as possible.” That company would also seek higher rents, with a plan to push up rates by about 5-10%.
Across the Atlantic, the fundamentals are different, underpinning strong storage economics not just for products but for crude oil too.
US tight oil producers continued to flood the market last year. As they did, the contango in the WTI deepened, supporting storage economics for US crude. By the week ending 4 March, the country’s crude stocks had soared to almost 0.522bn barrels, setting a new record for the fourth consecutive week.
Cushing’s tanks are now at around 80% capacity – considered the maximum level at which crude can be safely and practically stored in a tank.
Such is the rush on storage that traders have been leasing rail cars – many of them empty now that they aren’t needed to ship tight oil output from places like the Bakken – to hold the liquid. The lifting of the US crude oil-export ban so far hasn’t changed this need.
Naturally, this is good news for anyone with capacity to lease out. At Cushing, firms can charge about $1/b per month to store the crude, says Brian Busch, an analyst at Genscape – about twice the cost of facilities in Europe.
Even in New York harbour, one of the cheapest places to store oil products in the US, the price to lease storage on term deals of between three months to two years was around $0.70/b per month in mid-January.
Costs for storing distillates were between $0.60-$0.65/b. In Houston, closer to the supply glut, prices come in at around $0.90/b per month; and around $0.50-0.60/b elsewhere around the US Gulf Coast, according to Busch.
Around a $0.50/b contango is needed between the front three WTI futures contracts to cover crude storage costs, according to Busch. At the beginning of March, it was at about $3/b.
For refined products, burgeoning US gasoline demand kept processing margins high. Refineries maximised run rates, causing an excess of other less-needed products. A healthy contango has also supported storage economics for distillate fuels over the past year, leading to a build-up in stocks.
Gasoline and distillates stocks at New York harbour, the second-largest refined products storage hub in the US after the Gulf Coast – reached record-high volumes last year. Heating oil and diesel inventories more than doubled between spring and autumn 2015, to 13.7m barrels, according to Genscape. Gasoline stocks hit a record high of over 19m barrels in the third quarter.
More recently, total US distillate stocks for the week ending 11 March were just over 161m barrels, according to the Energy Information Administration, slightly down from a five-year high of 165.6m barrels last August.
Unlike in Europe, though, the products contango in the US has been narrowing. In mid-March the strip increase across the front three months for Nymex’s ultra-low-sulfur-diesel-futures contracts was just a few cents. At the beginning of January, it was more than $1/b.
The market has also been responding to the need for more depots. Almost 20m barrels of new crude-inventory capacity is expected to come online in the next two years, reckons Genscape. Crude-storage firm Fairway Energy is developing a facility at Pierce Junction, near Houston, which will be able to hold around 10m barrels across three underground salt caverns. It is due on line this year.
Enbridge, Phillips66 and others are also quickly expanding capacity at facilities in Louisiana, and in Houston and Beaumont, Texas. Companies including Kinder Morgan are expanding facilities in Cushing too, which will add another 1.93m barrels to total capacity. All of these projects were expected to be on line by the end of March.
Another 2.28m barrels of Cushing’s capacity is currently under maintenance. It is expected to be available again by the beginning of April.
All of that new capacity should keep the US from breaching tank tops, says Busch. “We have well over enough storage capacity. If the trend of crude oil and products building over the past 12 months continues, we wouldn’t see storage capacity met until mid-2017. And now we’re starting to hear significant announcements from refineries re run cuts as margins fall.”
Nonetheless, if refineries cut runs in the coming months, supplies of refined products could fall, leaving more crude needing storage. Nearby options are limited too. Storage tanks in the Caribbean – often used by Latin American crude producers and European trading houses – are virtually full. This has forced some producers to sell their crude at a loss, and certainly won’t help US producers find a temporary home for their oil.
In Asia, meanwhile, crude stocks have also built over the past year. But higher costs to store the oil and an abundance of capacity has kept a lid on demand for storage, especially compared with Europe and the US.
Average costs to store crude in Asia are higher than elsewhere because of a shortage of convenient land, which hikes up costs on which to build new facilities.
Nonetheless, crude stocks in Asia’s OECD countries stood at 198.2m barrels in December, around 25m barrels, or 13%, higher than a year earlier. Oil-product inventories in Singapore – Asia’s main storage and trading hub – stood at around 57.3m barrels for the week ending 2 March, about 11.5m barrels more than a year before and 14.6m barrels above the five-year average, according to BNP Paribas, a bank. Chasing demand In spite of ample spare capacity across Asia, new storage is still being built. Wood Mackenzie, an energy consultancy, says another 280m barrels (or 45m cm) of crude oil-storage capacity will be added by 2017, although around 185m barrels of this will be for strategic-storage facilities in China and India.
In greater Singapore, capacity will reach 23m cm (144.6m barrels) this year, says the consultancy. Storage costs in Singapore are generally higher than in Europe and the US because of a scarcity of land.
Despite these pressures, costs have even fallen at some of the region’s facilities as contract lengths have become shorter, averaging just one or two years, down from around three or fours years previously. This suggests traders still see a glut, but it won’t last as long as expected in Europe and the US.
“The market was on the verge of overcapacity but the contango structure has helped (boost demand to store),” says one market participant. Singapore’s rates remain something of an anomaly, he says, with a premium on storing oil in its tanks. Indeed, for facilities considered to be premium assets, with good links to export markets, the price can reach around $5.50/cm per month (equivalent to $0.88/b). Other terminals in less desirable locations – further from Singapore’s trading hub and with less attractive transport links to markets – charge around $3.00/cm. Floating-storage rates, meanwhile, also stand at around $3.00/cm per month for a three to six-month rollover contract. But vessels have to be available and freight rates vary depending on the type of ship involved.
A source at a storage-owning company with facilities in Singapore said storage rates have been relatively stable over the past two or three years and have even fallen in some places by up to 3%, as the region’s capacity exceeds demand. So despite strong builds in levels in the past year, storage owners in Asia have not enjoyed the same kind of rush on their facilities seen in Europe or the US.
In short, stark regional differences in the storage business have emerged: while it pays to store products in Europe, the bonanza in the US has been for crude storage. In Asia, floating storage has performed best.
And to judge from the storage market, the supply glut still looks likely to persist a while yet – even counting some recent draws. US crude stocks continued to build in the first quarter of 2016 and Europe’s distillate glut is shrinking only slowly. Storage-market participants reckon it will take between a year and 18 months for crude and oil-product inventories to draw down on both sides of the Atlantic. Until then, storage owners will see healthy demand for their tanks.
China’s SPR: cheap-oil guzzler
Consumer appetite for oil in China may not be what it was – but the country is not slowing its quest to build strategic stockpiles. On its own, the country may have accounted for more than half of the 1.1m barrels-a-day (b/d) build in non-OECD crude stocks in the fourth quarter of 2015.
That marks a contrast with the numbers representing how much China is actually burning – as opposed to importing. This year, Chinese oil consumption will rise by just 331,000 b/d, or just over half the pace last year, according to the International Energy Agency (IEA).
Yet despite the apparent weakness in demand this year, China imported a record 8m b/d of crude in February – a 21% rise from January, according to investment bank Barclays. The average for the two months, of 7.15m b/d, was about 8% higher than a year earlier, and in line with the year-on-year rise in crude imports seen in Q4 2015. The IEA says “large quantities of refinery output went into product inventories and not ‘true’ demand” – helping to account for the discrepancy between softening consumption and record-busting imports.
Chinese national crude stocks built by 1.4m b/d in December, the IEA reckons, with some of these volumes destined for newly completed strategic storage capacity at Zhoushan and Jinzhou. In rather understated fashion, the agency called that build “significant”. But it’s actually huge – and, if true, means China on its own hoovered up much of the world’s over-supply.By comparison, government data show a 5m-barrel build in gasoil stocks in January alone – equivalent to around 160,000 b/d.
China’s National Bureau of Statistics said in December that the country’s strategic-petroleum reserve (SPR) had more than doubled its crude holdings, to 191.31m barrels by mid-2015. On 20 November 2014, the reserve stood at 91.1m barrels, implying that in the intervening months China poured 471,000 b/d into storage.
At February import levels, China’s SPR now equates to 24 days worth of crude import. The government has said that by 2020 it wants to build enough crude stocks to cover around 90 days’ worth of net imports – in line with guidelines at t