Rajesh Nair and Rohan Menon throw light on the present market situation concerning crude oil and LFSO in an article published in Platts. They also discuss on the challenges concerning the storage of both crude oil and LFSO. In addition they also bring forth the opinions of various industry players and experts on this present situation.
Crude oil storage vs LFSO storage
- Singapore-based oil traders look for crude oil storage from January 2020.
- Widening contango market and mass storage of crude oil may be beneficial.
- Companies stockpile LFSO on landed tankers and floaters.
- To meet the demand from IMO’s mandate to limit sulfur to a maximum 0.5% for marine fuel from January 1, 2020.
“We have looked at doing it. It’s a good trade if you can make it happen,” a Singapore-based fuel oil trader at a western trading company said.
Crude contango vs LSFO contango
- The contango at the front of the ICE Brent futures curve has widened to average $2.22/b so far in April
- As compared to the March average of $1.52/b, or $16.27/mt and $11.14/mt.
- The outright value of front month ICE Brent futures have dropped to average $30.64/b, or 11.5% lower from the March average of $34.62/b.
“In theory, it makes perfect sense,” said the fuel oil trader.
- Marine fuel have already been resorting to store product.
- Due to a sharp drop in flat price coupled with a demand slump.
- A move also facilitated by a steepening contango in the low sulfur fuel oil market.
- The contango at the front of the Singapore Marine Fuel 0.5% swaps curve has widened to average $8.89/mt so far in April from the March average of $5.11/mt.
- The outright value of Singapore Marine Fuel 0.5% cargo has dropped 19.44% to average $233.74/mt so far in April as compared to the March average of $290.17/mt.
“[It] makes sense since the crude contango right now is more than the LSFO contango,” another Singapore-based fuel oil trader said.
Crude oil storage in favour
- A surge in inquiries over the past few weeks to charter vessels.
- Either Vitol or Glencore or the two companies have co-leased the 3 million barrel ultra-large crude carrier “Europe” to store crude.
“May be Vitol is now using [Europe] to store crude. It’s a lot better than storing [marine fuel] 0.5,” said the first trader.
Oceania, the only other ULCC in the world predominantly used to store low sulfur material for the marine fuel 0.5% market in Singapore waters.
“Many of the floaters should be taken on to do crude. We hear some in the market, but ships are limited. [Vitol] is still looking for ships, but nothing firm yet,” said a source close to Vitol, and with direct knowledge of the matter.
Deterring factors
- Short tenured high charter rates are not so encouraging.
- For example, charter a VLCC for 3 months shot from $80,000-$90,000/day, from $30,000-$40,000/day at the start of the year.
- Storage of the crude for a longer period may not give the expected outcomes in comparison with storage of fuel.
- At least with fuel you can look for a home, but not quite the same if you’re holding crude at the end of three months.
- Turning out a VLCC full of LSFO and substituting it with crude oil is no easy thing.
- Especially when the LSFO market is doing quite badly right now.
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Source: SPGlobal
