The last couple of months has seen much talk in the oil markets about the unwinding of floating storage positions.
Goldman Sachs was among those who noted that crude was increasingly being moved out of tankers on account of the changing structure of the oil future curve — which had gone from a steep contango a year ago to a near flattening just one month ago.
Indeed, as Barclays Capital noted on Thursday:
The fundamental picture is one where market balances at the front are getting tighter, primarily driven by the phenomenal pace of growth in non-OECD countries, aided by a tight reign on the supply side still exercised by OPEC. In this context, the possible failure of OECD demand to record any growth, after a long run of quarters of demand falls, is not exactly a game changer in itself, and should thus be of no impediment to the oil curves flattening further. In fact, the whole WTI curve looks very different now than it did a month or two months ago. While at the end of 2009, movements in the curve were parallel shifts higher, since the start of the year, the back end of the curve has remained well anchored. Largely, it has been the front that has outperformed, with the Dec 18-Dec 10 spread shedding $11 so far this year, Dec 17- Dec 10 narrowing by $9.25, and so on. From Dec-10 onwards, the curve is virtually a flat line.
But things move quickly.
In the last week there has been a significant re-instatement of the contango on the short-side of the curve, something that’s well observed in the following chart from BarCap (note the dark blue line):
Barclays itself believes this is just a short-term effect, resulting from some tempered US data readings, the last dregs of floating storage making its way back to land and the intense period of index rolls.
Indeed, as they noted:
All of this takes a little time to work through the system, but ultimately, our view remains that the physical crude oil market is headed towards tightening, on the back of rampant non-OECD oil demand growth and commensurate draws in global crude oil inventories bringing the vastly reduced overhang to ‘normal’ levels,
But, there are others who feel there might be a little more permanence to it.
For example, there are signs from the tanker market that the recent structure might already be encouraging some crude volumes back into offshore floating storage.
As ICAP shipping observed in a note on Friday:
VLCC storage employment is increasing once again as we thought was likley during the 2nd quarter. Iran appears to be using more vessels to store its own crude. The IEA reports that Iran may be having difficulty in selling some cargoes due to a seasonal overhang of heavy crudes during refinery maintenance and also greater difficulty for buyers in securing credit for sales. Iran stored as much as 30 millions bbls of heavy crude on tankers in Q2 2008 and we believe the volume is up to his level once again.
The contango in crude oil futures prices has also widened in recent days. The price spreads between future months now seem to be sufficiently wide to attract more traders to use vessels for storing cargoes. Therefore we may see that the number of vessels storing increases further in the coming weeks if this situations persists.
Which suggests it’s probably too early to call the end of contango and the floating storage trade just yet.
Related links:
Distillate hangover – FT Alphaville
The GOD (glut of distillate) delusion – FT Alphaville