If you're a VLCC owner, how about making your ship available for $13,000 a day for a floating storage opportunity?
No?
Well then, that's pretty much it for the contango and floating storage market based on current Brent crude prices, according to a new client note from Evercore ISI equity analyst Jonathan Chappell.
"Backwardation is coming...or is already here," Chappell proclaims in the note, which otherwise seeks to read the tea leaves for the upcoming Opec+ negotiations on production cuts.
"The contango curve has narrowed to a point where the breakeven VLCC rate to make floating storage profitable for a trader has fallen below cash breakeven levels," Chappell writes.
"Today, the 3-month Brent curve is oscillating at around a $1/barrel contango, which equates to $13,000/day breakeven for a VLCC at current oil and bunker prices. Clearly, no owner is accepting this sub-breakeven level for their ship."
On top of this, Chappell notes that the Dubai oil curve had fallen into backwardation Thursday: "the first step to more aggressive floating storage unwinds, and if history is any guide, the Brent curve should follow suit. Barring a collapse of OPEC, of course…"
Ah, about those OPEC meetings. Or more accurately Opec+, which besides the cartel members includes the likes of Russia, Mexico and Malaysia.
Chappell tries to handicap the outcome of next week's gathering, at which Saudi Arabia will try to persuade Iraq and Nigeria to honour a one month-to-three month extension of production cuts totaling 9.7m barrels per day (bpd) rather than shifting to a 7.7m bpd cut in July as originally planned.
The most likely outcome? Success, Chappell reckons, at least for a one-month extension.
The implication: more bad news for tanker owners.
"This outcome is unfavorable to the tanker market as it removes an extra 2 mbd of supply from the market at a time when floating storage is set to begin unwinding. Sentiment alone from this move is likely to be damaging to tanker equities," Chappell writes.
The second likeliest is reversion to the plan for a 7.7m bpd cut from July to December, which already has been priced into assumptions and would be neutral for tanker owners, he says.
Least likely is another standoff as happened in March between the Saudis and Russia, and another Saudi retaliation by flooding the market with oil.
For tanker owners not happy with the idea of accepting $13,000 for a VLCC and remembering $200,000 in March and April, option three evokes the most famous line from the 1994 film Dumb and Dumber:
"So you're telling me there's a chance?"
