30th April 2010 - The Mid 40s Rump And Its Welcome Consequences
During 2010 the total number of tankers storing both crude and products has fallen steadily, from a peak of around 150 vessels in November 2009 to 92 at present. Products storage, mainly of gasoil stored in NW Europe has fallen by over 60% - from just under 100 million bbls to 40 million bbls today. Recent storage fixtures to absorb surplus jet fuel, resulting from the flights grounded by Icelandic volcanic ash, have done little to stem this decline.
In contrast, crude storage was stable at around 55-65 million barrels between July 2009 and early March 2010. Moreover, March and April have seen large gains with 81 million bbls now being stored. The players and reasons for crude storage have also expanded, beyond the traders and oil majors initially involved in contango plays. Now, oil producers in the shape of Iran are holding stocks onboard NITC tankers. Having previously engaged in floating storage in 2006 and 2008, they are no strangers to the game.
Iran has been struggling to find buyers for certain of their heavier crudes, which have been facing increasing competition at the same time that its Asian refinery customers are engaging in seasonal refinery maintenance. Unwilling to greatly slow production, and without onshore storage for the oil produced at its offshore Soroush and Nowruz oilfields, Iran has used more and more of their own fleet to store ‘surplus' supplies. We estimate that they are currently using 17 VLCCs and 1 Suezmax for this purpose in the Gulf area - which equates to a staggering 35 million barrels of oil, or around 10 days of total national production. How long the Iranian storage will go on is unclear, history would indicate that it will be drawn down during the third quarter as refinery capacity will have come back onstream and oil demand rises.
Iranian involvement has now pushed the number of VLCCs storing to 44, and it is the presence of this rump that has been crucial to supporting VLCC freight rates in 2010, not least minimising the impact of the 17 newbuildings which have been delivered into the VLCC market so far this year. Six months ago, average spot earnings for VLCCs trading from the Middle East Gulf to Japan were $24,000/day - today earnings have more than doubled to stand at around $55,000/day. In the same period, rates in the larger clean products market have halved, with LR2 earnings down from $22,000/day to $11,000/day today - in tandem with the drop from 75 to 38 vessels storing. Thus, at the risk of repetition, storage continues to play a crucial role in the health of both the clean and crude tanker markets and it is worth noting that oil market talk is now of a widening contango, which may again entice more players into the storage market.
