The Case of the Contango: Supertankers used to Hoard Crude for Later Sales

Posted by PortVision

Contango-Tanker-Ship.jpeg

With continuing low oil prices globally, countries and companies are stockpiling vast quantities of oil. A recent CNN Money article emphasizes China's aggressive policies to build its strategic oil reserves in this regard. The 440,000 ton TI Europe has been leased by China's state owned oil company, Unipec. It is anchored just off the coast of Malaysia in the Strait of Malacca holding 3 million barrels of oil. It is costing China $40,000 a day to store the oil until it is sent to China in smaller ships.

Contango, the storage of oil in offshore supertankers, has become commonplace. Previously two or three ships might be storing oil. But now, around the world, almost 20 of these tankers are being employed for storage. According to Bloomberg, the most oil in 80 years is now being stored.

Contango occurs when futures prices are greater than the current spot price. Buying oil cheap and selling when the price rises is profitable even with the steep storage and finance costs. Investors believe the expense of buying a futures contract is more than waiting to buy oil on the market due to the oversupply of oil.

So much crude is being stored that onshore tanks are filling up. Thus, countries and firms have looked to tankers to supplement land storage. Contango stepped up in 2015, reports the Wall Street Journal. The TI Oceania Ultra Large Crude Carrier is anchored off the coast of Singapore, storing 3 million of barrels of oil for Vitol SA, a firm specializing in oil trading. Other major traders (like Gunvor SA, Trafigura Beheer BV and Koch Ltd.) have chartered supertankers that can store a total of 30+ million barrels of oil. Shell has hired two carriers, the Xin Run Yang and the Xin Tong Yang. Iran, partially due to the sanctions placed on its oil sales, has been storing oil offshore in 15 VLCCs, each capable of holding 2 million barrels.

Tankers are also anchored off the coast of Gibraltar in southern Spain and outside of the ARA ports. As well, Marine Link reports that in addition to tanker storage, longer routes are being charted so that these tankers will reach their ports as prices rise and the oil will become more profitable. Cargoes from the middle East and India have diverted around the Cape of Agulhas (the southern point of Africa) on their way to Europe rather than utilizing the Suez Canal – increasing the trip to 30-40 days, rather than 15-20 days.

MarineLink speculates that floating storage could remain a feature of the marketplace. This does restrict the supply of tonnage to carry freight but it remains to be seen whether this trend is a positive or a negative for the tanker market.

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Posted on Jun 1, 2016, 6:07:00 AM

Topics: Tankers, Oilstorage, CrudeOil