Floating storage deals are helping VLCC rates jump in the spot market as forward crude prices continue to increase.
Up to 20 big tankers have been removed from the market to hoard barrels at anchorages worldwide.
"Floating storage is really the name of the game presently," Fearnley Securities said on Friday.
The investment bank — an arm of Astrup Fearnley Group — said the forward curve shows a $10 per barrel boost in oil price in six months, supporting rates as high as $110,000 per day, and a $13-per-barrel hike over the next year, supporting tanker rates as high as $65,000 per day.
In the spot market, trips from the Middle East Gulf to South Korea are paying $103,000 per day, with eco-vessels fitted with scrubbers attracting $10,000 per day on top of this.
This is up from $91,000 per day on Thursday.
Trend to continue
"The paper market followed suit with [the TD3C] Saudi Arabia-China route closing 24% higher for the second quarter," said analysts, led by Espen Landmark Fjermestad, Peder Nicolai Jarlsby and Ulrik Mannhart.
"As long as Saudi keeps the pumps open and demand remains weak, this trend is likely to continue — we believe 15 to 20 VLCCs has been taken up for storage up until now."
Data from the Baltic Exchange showed the TD3C forward freight agreements were trading at their highest levels in 2020 as of late Thursday, with the April contracts priced at $143,455 per day and May at $124,590 per day.
The second-quarter contracts changed hands at $125,283 per day, the third-quarter ones at $70,618 per day, and the fourth-quarter at $69,996 per day.
Fearnley is also arguing that "theoretical onshore capacity appears considerably lower than many of the estimates out there given the structure of the contango", when forward crude prices are above current prices.
The firm added that should the contango widen over the coming months, as has been predicted, storage economics could be even better for owners.
"There is obviously a time when all this reverses but, for now, let’s enjoy the ride," the analysts said.
The cherry on top of the market
Brokers reported that previously failed cargoes reappeared this week, "sugared with additional requirements on top", giving a steady tone to the VLCC market.
Storage rates are competing with spot levels and give the added security of a longer term.
And, as TradeWinds has reported, product tanker owners have been drawn into the market as well.
They have been in talks with energy majors over floating storage deals, but few fixtures are likely to materialise due to lucrative freight earnings in spot trading, according to market players.
In mid-March, BP provisionally fixed Concordia Maritime’s 65,200-dwt Stena Polaris (built 2010) to store jet fuel for 40 to 60 days at $25,500 per day, Reuters reported.
With much of the world in lockdown, Fearnley said global oil demand is expected to plunge in the remainder of the first quarter and throughout the second.
Opec has been pushing output higher, with stocks looking set to grow at an unprecedented rate in the first half.
"In fact, one could easily argue that global onshore capacity of around 900 million barrels would be fully utilised by [the] end of June," Fearnley said.
This is on the basis of a 6m to 7m-barrel-per-day (bpd) reduction in demand, on top of a 2m to 3m bpd increase in Opec production.
"Floating storage provides some flexibility [as in previous cycles], but is unlikely to clear the flood of unsold oil," the analysts said.
"In effect, the only real balancing mechanism is reduced supply. To this point, the US is urging Saudi to back off its oil price war with Russia."
Refiners react
Refiners are already acting on lowered product demand.
Earlier this week, US refiner PSX was said to be running at "minimum crude processing rates".
In Asia, freight rates are already eating into margins, despite the amount of heavily discounted crude available.
"Refining is a margin business, and as long as there are margins refiners will run," Fearnley said. "But, when there is simply no demand for the end product, and you face the risk of running up the inventories, refiners will adapt.
"Adding to the woes, crude runs will also be reduced on the back of weaker product prices."
Max Tingyao Lin contributed to this story.
