Thursday, March 19, 2020

"Oil’s big storage problem" (TNK; FRO; EURN)

Izabella Kaminska writing at FT Alphaville:
Back in 2008 the economy suffered from massive oil demand destruction. The result was an epic contango structure in the futures curve which encouraged traders to charter tanks to store oil.

A contango (the opposite of backwardation) manifests whenever the price of commodities in futures contracts is higher than the cash price of commodities available today.

This allows traders to profit from buying cheap oil today and selling it on the futures market at a premium tomorrow. As long as the cost of storage is lower than the profit generated by the trade, the market structure encourages hoarding.

In 2008 the contango got so big (it was known as the super-contango) the economy ran out of spare capacity in on-the-ground facilities to store it in. But the profitability of the contango trade was so huge it actually paid to charter tankers explicitly just for the purpose of storing oil.

While it’s tempting to say the same thing will happen this time round, it might well not.
The problem the sector is now facing is that there will probably not be enough physical storage capacity to park all the unneeded global oil supply for the duration of this crisis.

If that’s true, some fields may have to be shut down irrespective of what Opec targets dictate. Not doing so would pose an environmental disaster, otherwise.....

March 16
"Surging Demand to Move Crude Oil Sends Smaller Tanker Rates Soaring"
March 16
Bargain Buying: "India plans to top up strategic tanks with cheap Saudi, UAE oil - sources"
March 10 
The Saudis Aren't Kidding: In Exceptional Move They Book Oil Tankers In The Spot Market To Move Flood of Oil
March 9 
"Wanted: Tankers to Store Oil as Price War Augurs Glut"
March 9
"Oil Tanker Owners Frontline and Euronav Both Up 10% on the Day (EURN; FRO)"
Feb 28
Oil/Shipping: "Frontline Bets on Strong Market Rebound Once Coronavirus is Contained" (FRO; TNK; EURN)