April 02, 2020 [Business Day – Published on March 31, 2020] – When it comes to commodities, the only thing in demand right now is somewhere to put them.

 
From oil tanks in Oklahoma to Wagyu beef refrigerators in Kobe, facilities around the world are filling up with products that can’t get where they’re needed or are simply not wanted at all. The cost of storage is exploding, in sharp contrast to the price of the commodities themselves, which are collapsing amid the chaos of the coronavirus.

It’s a potential windfall for the companies that inhabit this prosaic but critical corner of the commodities universe, such as oil tank firm Royal Vopak and even ship owners such as Euronav. And as conventional storage rapidly fills up, anyone holding on to products is having to get creative in the hunt for space or in some cases resort to just giving them away.

“If you’re a storage operator, this is the opportunity of a lifetime to capitalise on your assets,” said Michael Tran, MD of global energy strategy at RBC Capital Markets. “During times of pandemic and distress, when people generally have less optionality, that optionality comes at a premium. Storage offers that because storage offers time value.”

The world’s producers of raw materials are confronting a historic collapse in demand as increasingly drastic measures to stop the spread of Covid-19 bring economies to a standstill, paralysing factories, halting travel and crippling supply chains.

But stopping production is a worst-case scenario. It’s enormously costly and disruptive to shut down an oilfield or refinery, for example. What’s more, customers may be under contract to take delivery of the commodities anyway, regardless of whether they need them. So the supply keeps coming and storage gets fuller and fuller.

Nowhere is this more apparent than oil, one of the commodities hit hardest by the virus as demand craters and the biggest producers vow to pump more than ever before. At the current rate, the world’s inventories will be full by the end of June, according to IHS Markit.

The price of Brent crude has tumbled to the lowest in 18 years, which has also created a market structure that gives traders an incentive to store. By buying oil cheaply now and selling at a higher future price, they can profit as long as the difference is greater than the cost of storage, a strategy known as a contango trade.

Storage fees have more than doubled in the last few months, but traders are still desperately chartering vessels to hoard the fuel on the open sea, a practice known as floating storage. That’s triggered a three-fold jump in shipping rates this month.

“This is a once-in-a-generation type of event,” said Lois Zabrocky, CEO of International Seaways, one of the world’s largest providers of tankers. The firm has seen an uptick in business as charterers are starting to book vessels with storage options for periods of more than a year, she said.

Ship operators such as Frontline, Nordic American Tankers. and Teekay have been a bright spot in an otherwise catastrophic energy sector, and oil storage firms such as Dutch Royal Vopak are also benefiting. A jump in demand for storage is boosting rates for tankers owned by Belgium’s Euronav, according to Brian Gallagher, the firm’s investor relations manager.

Citigroup estimates the world has 1.7-billion barrels of spare crude storage and is forecasting an increase in stockpiles of as much as 1.6-billion barrels in the second quarter. Trafigura Group, the second-largest independent oil trader, expects as much as 1-billion barrels to be sent into tanks in the coming months.

The situation in the US may be the most extreme. The largest oil hub in Cushing, Oklahoma, could hit capacity in April, while traders have been scrambling to store barrels along the Gulf Coast. Magellan Midstream Partners said it recently contracted 2-million barrels of crude storage to customers for use through 2021 in Texas due to increased demand.

Desperate companies are having to think outside the box. Pipeline operator Plains All American Pipeline suspects some traders may try to stow away crude on its network until prices improve. In the last downturn from 2014 to 2016, old rail cars were used to store oil.

Given the scale and speed of the demand hit from the coronavirus, the storage situation may already be reaching a breaking point. In the US, pipeline operators are asking oil producers to voluntarily lower output, a clear sign storage capacity is being overwhelmed, while some drillers are calling on the government to limit supply from shale fields.

The nation’s ethanol producers, who make fuel out of maize, are shutting down because storage tanks are full and there’s little demand as drivers stay home. Refiners globally are throttling back runs, with plants in Canada and Italy starting to close entirely.
 

Cold storage

It’s not just oil tanks that are filling up. While fresh agricultural produce is at risk of shortage in some regions amid a lack of labour and hoarding, luxury meats and handmade cheeses are quickly filling up warehouses from Kobe in Japan to Emilia-Romagna in Italy.

“We can’t fit any more Wagyu in Japan’s storage facilities,” Taku Eto, Japan’s minister of agriculture, forestry & fisheries, said on Friday. “We have live cattle that have reached maturity, but we don’t have the room to turn it into meat.”

Japan is trying to free up warehouse space for its silky Wagyu beef, premium melons and the fattiest parts of tuna, even contemplating distributing coupons to sell the goods at a rock-bottom price, according to newspaper Asahi Shimbun.

Even before the pandemic, refrigerated warehouses across the US were operating above levels considered full, according to Lowell Randel, vice-president of government and legal affairs for the Global Cold Chain Alliance.

“The current response to the outbreak places a further strain on capacity,” Randel said by e-mail. “Customers are reaching out to our members to find additional storage capacity, as well as logistics services to effectively meet shifting demands.”

Metals demand is also tanking, leaving an overhang of rapidly accumulating stockpiles around the world. But that’s not translating yet into higher fees. Over the years, traders and banks have taken ownership of warehouses themselves, and if push comes to shove could store the metal in the open air, an option closed to most commodities.

Metro International Trade Services, which operates metals warehouses, hasn’t seen a change in pricing yet, according to MD Ben Dunn. Even if production continues but consumption dramatically slows, “space would be found to house metal”, he said by e-mail.

As for natural gas, inventories across Europe are 54% full, with levels 45% higher than the average of the past 10 years. Storage operators, including Germany’s Uniper and France’s Storengy, sold all capacity this season at rates as much as two-thirds higher than previous years.

Like oil, liquefied natural gas (LNG) suppliers are turning to floating storage, which is far from ideal because the super-chilled fuel slowly evaporates. Seventeen LNG vessels around the world were identified as floating storage by March 27, compared with just four on March 19, according to commodity supply tracking firm Kpler.

“With the lockdown now taking a big toll on EU gas demand, coupled with high discharges in the past months, inventory levels are due to reach tank-top situation, and floating storage will likely increase over the next few months,” said Rebecca Chia, an LNG market analyst at Kpler.

The LNG market gives a clue as to what happens when storage eventually runs out.

When tanks became too full in the past two months, some buyers evoked a rarely used legal clause that absolved them from meeting their contractual commitments for reasons beyond their control. These force majeure declarations resulted in a surge of unwanted cargoes, triggered an immediate drop in spot prices and — a big fear for any supplier — international arbitration.

“The outbreak of the pandemic has shown that the world has a woeful lack in storage capacities,” said Henning Gloystein, an analyst at Eurasia Group. “If ports around the world start turning away shipments because their tanks and warehouses are full, then product values will tumble.”

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