Recent chatter over resurgence of floating storage demand in the tanker market is likely “much ado about nothing” as not many vessels are good candidates for contango play, analysts at Alphatanker have argued.
The recent flurry of time charter fixtures amid weak prompt oil prices have prompted speculation over a second wave of storage play, giving shipowners hope that a strong rate recovery is imminent.
But Alphatanker suggests the actual number of vessels entering floating storage could be scant because the oil market is not facing severe oversupply.
Oil firms are only likely to profit from contango play when chartering aged VLCCs to store crude and newbuilding ones for gasoil, according to the analysts, but the opportunities are limited for such fixtures at rates satisfactory for both shipowners and charterers.
“All things considered we do not believe that we are on the cusp of another wave of floating storage,” the analysis unit of AXSMarine said in a weekly note.
Cheap old ships wanted
VesselsValue data shows 20 VLCCs have been fixed on period charters this month, of which all but one are for six months or shorter.
However, just five of the vessels were built before 2010.
With the current contango in Bren crude futures, a six-month VLCC storage would only be profitable if daily charter rate is below $31,000, Alphatanker analysts have calculated.
Estimates of brokerage BRS suggest that the one-year rate for a modern VLCC is about $36,000 per day while older tonnage, depending on ages, delivery options and charter lengths, could be $15,000 cheaper.
“The current-fragile economics of crude storage imply that it is only profitable on older, cheaper tonnage,” Alphatanker said.
Gasoil play
Some oil players have suggested storing gasoil in Europe might be profitable due to widening contango in the gasoil market.
Gasoil contango play would be profitable if a newbuilding VLCC can be chartered for storage at up to $51,000 per day for three months and $46,000 per day for six months, Alphatanker estimates.
Recent reported fixtures include a small number of newbuildings chartered at $42,000 per day for six months.
But Alphatanker analysts said traders would face challenges in finding the right deals due to the low availability of newbuilding VLCCs.
According to them, just 17 VLCCs are slated to hit the water before the end of this year, versus 68 for the whole of 2019.
“The biggest obstacle to traders undertaking such a play is access to a clean VLCC with newbuildings now scarce,” said Alphatanker, adding that daily rates for newbuildings are up to $10,000 higher than those in trading.
Reduced demand for storage
In the second quarter, the coronavirus-triggered demand collapse and a price war among major producers led to what many described as “super contango” in oil markets.
This resulted in a record amount of crude and refined products stored at sea and many young ships were used for storage due to a shortage of vessels then.
But the Opec and its Russia-led allies have initiated a historic supply cut since, and global oil consumption is slowly recovering with the relaxation of lockdown measures in many countries.
Alphatanker has expected global oil inventories to fall 230m barrels in the third quarter and 430m barrels in the fourth, saying oil demand will outstrip supply in the next 12 to 18 months.
“As inventories have drawn, the pressure on onshore storage capacity has reduced over the past few months,” the note said.
“Against this undersupplied backdrop, it therefore seems counter-intuitive that floating storage would build.”
