Storage capacity, typically located near ports or key distribution areas, allows traders to sit on cargoes until prices improve. That has become more enticing over the past two years as oil has come off record levels of nearly $150 a barrel.
“Access to storage is the entry card to arbitrage,” said Ben Holt, vice president of downstream consulting at Wood Mackenzie, a consultancy in London. “There is an increasing trend for trading companies to understand that they need to have access to oil storage in order to do the things that they do,” like export crude and other oil products to places with higher prices.
Over the last two years, companies have used storage to take advantage of a sharp contango price structure — where futures prices get progressively more expensive further into the future. If storage costs are low enough, the price structure allows traders to make a profit by buying crude or products in the spot market, then selling them at a pre-agreed price in the future.
“I think that storage is attractive because there’s a perception that. . .prices are going to be stronger in the future,” says Malcolm Turner, chairman of Dallas-based consultancy Turner, Mason & Co. “The construction costs are about as low as they are going to get,” and building tanks now appeals to participants who fear that future costs will skyrocket.
In the U.S., rising storage capacity at Cushing, Okla., the delivery point for the New York Mercantile Exchange’s light, sweet crude oil contract, has been cited as one reason for the widening of the contango in Nymex crude futures to nearly $5 at one point in May.
The storage boom has boosted shares in Rotterdam-based Vopak NV, the world’s largest independent storage company for oil products and chemicals, by 77% over the past year. U.S.-based NuStar Energy LP is up 2.4% over the past year, but off 14% from its late-April peak.
The appetite for storage space looks set to continue.
“The market is so lively,” backed by demand from customers to rent tank space, said Rob Luijendijk, managing director of Rotterdam-based consultancy Downstream BV, which has a stake in the world’s largest database on tank terminals. Total global tank storage capacity should increase 5% to 7% annually over the next few years from a current, according to its PortStorage Group subsidiary.
Global commodities trader Vitol Group says it plans to raise its tank capacity by 60% to eight million cubic meters by 2012 from more than five million cubic meters currently. Other large traders — including Glencore International AG, Mercuria Energy Group and Trafigura Group and Noble Group — have increased storage capacity in recent years.
