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Floating storage could support weak tanker market

Photo: CMES China Merchants Energy Shipping New Vision VLCC
With global oil demand now significantly lower than anyone expected just a few weeks ago, oversupply could well push oil prices down further and this could lead to a build-up in floating storage, according to analysis from New York broker Poten & Partners.

The opinion follows the inconclusive outcome of last week’s OPEC+ meeting at which Russia is understood not to have agreed to the proposed additional 1.5m barrel per day cut in output. If the reduction had been agreed, Poten says that OPEC’s output would have fallen to levels not seen since 2003.

The firm suggested that if the reduction in output does not go ahead, a contango market where futures prices trade at a premium to oil prices today, could lead to an upturn in floating storage. Noting that the market has mostly been in backwardation since mid-2017, a situation in which current oil prices are higher than those in the future, Poten says that the market has recently switched back to contango.

“Floating storage will be profitable if the 12-month spread is higher than the cost of the vessel and the interest charges for storing the crude,” said Poten. “We are not there yet, but the economics are moving in the right direction.”

Tanker rates are significantly lower than levels prevailing in the last quarter of 2019 but Poten believes the position could have been worse given the dire economic situation that is unfolding with the spread of coronavirus. “It seems that bottlenecks in the global transportation system and increased floating storage are already supporting rates,” the firm concluded.

TAGS: Americas VLCC