February 9, 2016 [OPIS] - Short-term storage of crude onboard tankers has become profitable amid falling freight rates, even as floating storage of refined oil products remains uneconomical, according to Wells Fargo Securities.
The contango for Dated Brent has made storing crude on tankers for up to three months profitable, mainly because of falling tanker storage costs, senior analyst Michael Webber said in an e-mailed report Friday.
Rates for Very Large Crude Carriers (VLCCs) that can hold around 2 million barrels of crude, or 270,000 metric tons, have dropped to $48,000/day, nearly 50% below levels at the end of last year, according to the report. Oil trading company Glencore has booked four VLCCs around Singapore for short-term crude storage of between 45 and 60 days, while the economics for storing distillates remain “firmly” negative, Wells Fargo said.
“We note offshore storage costs are roughly $0.70/barrel per month,” Webber wrote in the report. “Relative to a Dated Brent Contango of approximately $0.79/barrel per month, (this nets) a narrow return of roughly 0.5% for three-month storage plays.”
Still, several factors in place suggest floating storage could become profitable for refined oil products, Webber said. Elevated crude runs in Europe, coupled with strong imports from the U.S., Middle East and Baltic, have left onshore product inventories bloated, near 75% utilization, which is well above historic ranges. Weakening European cracks spreads, especially for gasoline, has curbed European exports. An unusually warm winter in both the U.S. East Coast and Europe has cut demand for heating oil, while falling rates for oil-product tankers have boosted storage economics.
“While economics need to improve, we believe these factors could potentially result in a distillate storage catalyst, tightening product tanker spot market rates via incremental tanker supply reductions,” Webber wrote in the report.
