Oil optimism unwinds rushed storage deals
London/New York/Singapore — When the world economy slammed on the brakes in 2o20, there was a rush to store a wave of unwanted crude and products, but rising prices and optimism about demand is spurring a swift unwinding of storage contracts.
At the end of February, the volume of refined products held on stationary tankers for over 10 days stood at 19.2-million barrels, down 77% from a peak of 84-million last May, IHS Markit estimates show.
Oil cartel Opec and its allies, a group known as Opec+, closely monitors global inventories, and the rate of drawdowns will be a factor discussed when it meets on output policy on Thursday.
A year ago, traders were struggling to find storage capacity, and prices for it surged as fuel consumption plummeted. Earnings for product tankers surged to record highs above $100,000 a day last May versus less than $10,000 now.
Remote salt caverns in Scandinavia and unused US pipelines and trains were pressed into service. But now, capacity is again becoming available, in northwestern Europe, the Mediterranean, Middle East and North America, brokers said.
“Parties are giving notice to terminate contracts by April-May,” said Krien van Beek, a broker at Odin-RVB Tank Storage Solutions in Rotterdam.
Brokers in the US are also seeing lower prices offered for storage of crude and products.
“In January the unrelenting price run-up (in oil futures) commenced, and that scared people away who had been considering taking on storage positions,” Ernie Barsamian, CEO of the Tank Tiger, a US terminal storage clearinghouse. “We are now in full backwardation and we are seeing contracts expire without renewals,” he said.
Backwardation, where spot prices are higher than for later delivery, encourages traders to draw down oil supplies and sell promptly.
In Europe, the six-month diesel spread reached $8 a tonne on February 19 in its biggest backwardation in 13 months, Refinitiv data showed. The spread was as low as minus $92 a tonne last April, when the world population went under strict lockdowns.
Storage capacity is expected to become available in the second quarter, especially in Scandinavia, according to Odin-RVB Tank Storage.
The six-month US diesel futures spread reached 4.35c a gallon on February 19, its highest since January 2020. At the start of last March, it stood at minus 3.2c.
The diesel futures benchmark on the New York Mercantile Exchange is also in backwardation. Diesel for April delivery was trading at about 0.5c a gallon more than for May. A year ago, it was in contango, trading at about 0.2c a gallon less than the May contract.
US distillate inventories in the week to February 19 fell to 152.7-million barrels, their lowest since the end of 2020, Energy Information Administration data showed.
While Singapore middle distillate inventories have surged to a 12-week high this week, analysts and traders expect a tighter market in coming months as regional refiners enter the spring maintenance season, and as demand gradually rises as Covid-19 restrictions ease.
“With less of an incentive to store, we would certainly expect to see a reduction in storage of diesel,” said Kevin Wright, lead analyst for Asia-Pacific at data intelligence firm Kpler, which tracks oil shipments.
Global floating storage of clean products fell by 2.7-million barrels in the week to February 22, Kpler data showed, with most of that fall coming in West Africa and the Singapore Strait.
The front-month spread for the benchmark gas oil grade in Singapore has been in backwardation since the start of February, prompting traders to draw on stocks in storage. Storage in the Middle East is also showing the same destocking trend, brokers said, though at a slower pace.
Tank farm owners and operators are also struggling to secure storage contract renewals in the Caribbean, sources said.
Curacao Refinery Utilities RV is trying to lease 5.8-million barrels of storage capacity at the Bullenbay terminal. Negotiations have fallen apart several times as potential customers offer low rates.
With 100-million barrels of crude and products storage capacity, the Caribbean is the US’s largest oil storage hub overseas.
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