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The VLCC floating storage play

The VLCC floating storage play
Analysts are beginning to ponder the possibilities of a floating storage play for VLCCs if the present contango - oil futures prices higher than current prices - is maintained.

In the last great wave of storage 2009/2010 at maximum up to 60 VLCCs were tied up in storage by traders betting on future profits on the oil they had bought and put aside. VLCC earnings were reckoned to be an average of $50,000 a day against the $20,000 a day if all the absent ships had been operating on the spot market.

Then most charters were short term - three or six months. The trouble now is that with the spot market around $70,000 a day, owners are demanding much higher short term charter rates so that the storage play becomes very problematical.

London broker EA Gibson points out that although period rates have firmed - one year t/cs are currently about $33,000 a day - they are still lagging current spot rates by a long way. At these sort of levels the storage play looks much more attractive, and has led in the last couple of weeks to a flurry of enquiries. At least 20 VLCCs have been fixed for a year or more pushing one-year t/c rates to more than $40,000 a day.

The contango is not currently too much to get excited about - West Texas Intermediate is quoted at $53.28 for December delivery against a current price of $47.78. On such apparently thin margins fortunes are made.

If the contango structure in oil prices - a constantly moving target - remains workable for floating storage using one year VLCC rates, period rates will be under further upwards pressure, says the broker. However if the contango flattens, spot earnings ease and one year t/c rates become too expensive, there could be trouble ahead.