- The floating crude storage has tumbled to more than two-month lows as the incentives for storage start to recede.
- Floating volumes peaked at over 210 million barrels in late June, but there has been a steady decline since then as some VLCCs and Suezmaxes have come out of storage.
- Discharge delays in China have also increased sharply in the past few months as a rebound in buying caused logistical bottlenecks.
- Until congestion issues begin to ease and domestic/international product demand recovers further, current inventory build rates will continue.
- The fall in storage volumes is likely to be gradual with a variety of short-term and long-term charter options.
Floating storage at two-month lows despite inflated volumes off China, reports Platts.
The amount of crude and condensate hoarded on tankers has tumbled to more than two-month lows as the incentives for storage start to recede, although volumes offshore China remain high, putting pressure on the physical oil market, according to analysts.
Port congestion out of China
The easing of OPEC+ production cuts together with a gradual demand recovery have assisted the rebalancing of the global oil market.
But congestion outside the ports of the world’s largest crude importer, China, along with a slower than expected demand recovery, has meant floating storage levels haven’t tailed off sharply.
Data intelligence firm Kpler estimates that floating storage volumes were around 169.57 million barrels for the week beginning Aug. 17, the lowest since early May.
Floating crude volumes peaked at over 210 million barrels in late June, but there has been a steady decline since then as some VLCCs and Suezmaxes have come out of storage.
The Kpler data estimates the volume of oil on tankers that are idled offshore for seven days or more.
The bulk of crude on floating storage is in Asia, mainly China and Southeast Asia.
Discharge delays in China have also increased sharply in the past few months as a rebound in buying caused logistical bottlenecks, leading to a steady rise in floating barrels offshore China.
Around 100 million barrels of crude are currently on the water and waiting to discharge at Chinese ports, compared with 20 million barrels typically, according to S&P Global Platts Analytics.
“With the world’s largest buyer of crude awash in oil, this is likely to impinge on their purchases for the balance of the year, and key suppliers to China will likely need to look elsewhere to sell their marginal barrels,” Platts Analytics said.
Analysts said port congestion was also due to substantial onshore inventories and logistical issues for discharge. “Until congestion issues begin to ease and domestic/international product demand recovers further, current inventory build rates will continue,” according to Kpler analysts.
- An increase in floating storage volumes in the short term is seen as unlikely, despite fears of a second coronavirus wave, because the economics to add additional volumes are no longer supportive.
- But freight rates are unlikely to gain any major upward traction unless demand starts to rebound strongly.
- However, the fall in storage volumes is likely to be gradual as a lot of these storage plays were locked in back in April and May, with a variety of short-term and long-term charter options.
“Traders will be in no rush to liquidate those positions. That said, many of the contango play floating storage vessels were likely done as six-month charters, implying that many more are likely to be discharged by October,” Platts Analytics said.
Rates under pressure
Rates for VLCCs, the main tanker segment holding storage barrels, continue to be under lot of a pressure.
- Freight rates for a West Africa-East voyage, carrying a 260,000-mt cargo, have been hovering at very low levels in the last few weeks.
- Rates on this voyage were assessed at Worldscale 37.50 or $13.51/mt on Aug. 18, close to one-year lows.
- So far in August, rates on this route averaged $13.68/mt compared with $51.65/mt in April, Platts data shows.
- This rate was as high as $75.64/mt on March 16, when oil prices collapsed as Saudi Arabia and Russia entered an oil price war at the start of the coronavirus pandemic.
West Africa has also suffered from competition from US grades, with a much higher amount of China-bound US VLCC cargoes booked for September dates compared with West Africa.
There have been also been more Suezmaxes and Aframaxes that have come out of storage recently, and rates for these tankers are likely to remain weak.
“From what I have understood, most of the [Suexmaxes on] floating storage has already discharged so I don’t suppose it will hurt rates too much. However what will affect the spot rates would be the delays in the Chinese discharge ports,” a shipbroker said.
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