The epic fall of West Texas Intermediate (WTI) oil prices has underscored severe oversupply of crude, reinforcing market beliefs of increasing floating storage in the coming weeks, oil and shipping experts said.
The May contract for the US oil benchmark, due to expire on Tuesday, traded in the negative territory for the first time Monday afternoon with panic selling of traders who are worried that they cannot take delivery of cargoes.
“The extreme oversupply situation now in April and expected into May is creating huge dislocations for the May 2020 WTI…contract today in low traded volumes,” Rystad Energy’s head of oil markets Bjornar Tonhaugen said.
“There is probably a squeeze happening right now, while the remaining 21m barrels of Cushing storage is likely to be filled up into May at the current pace of stock builds.”
“200 VLCCs” for floating storage
While some charterers may require vessels for prompt liftings to take advantage of cheap oil, the collapse in May contracts is making contango play more profitable, according to shipping players.
“In May alone, we may see 200 VLCCs act as floating storage, as the oil market tries to find an equilibrium,” Affinity (Shipping) research head Sevita Kondyliou told TradeWinds.
Brent crude futures also fell by nearly 9% on Monday, resulting in a $2-per-barrel jump in six-month contango.
“Further steepening of the contango in both WTI and Brent will support storage on tankers as long as it persists,” a tanker owner said.
“You might not be able to charter a ship or find an empty tank in time to take advantage of today’s super low WTI, but the spread from June to December or June to June 2021 is still very high, justifying high tanker rates.”
Buoyant spot trade
On the Baltic Exchange, spot VLCC earnings for the US Gulf to China route were assessed at $111,571 per day on Monday, up $4,045 from Friday’s level.
More activity was observed on the benchmark Middle East Gulf to China route, where VLCC earnings increased by $8,971 to $174,576 per day.
According to Tanker International data, Kuwait Petroleum tentatively chartered the 319,000-dwt Nissos Despotiko (built 2019) for a voyage charter from the Gulf to South Korea at Worldscale 165, with a loading date between 27 and 29 April.
Tanker players generally believe spot trade will stay bullish in the coming weeks, with floating storage demand offering strong support to shipowners.
“The oil curve differential is still incentivising floating storage for economic reasons, but even more so given the logistical challenges,” Kondyliou said.
“Since March we have seen at least 60 VLCCs being taken on time charters, with the majority fixed for more than six months.”
Kondyliou added that “contango remains long enough and high enough to encourage storage”, and charterers can afford healthy rates and remain profitable.
