Strong Crude Structure Enables Release of Crude from Floating Storage

Apart from ATC, Western trading house Vitol was also said to be chartering a Suezmax tanker to lift crude cargo from Linggi and headed for Thailand.

In addition, oil major Chevron is scheduled to lift crude cargo from Tanjung Pelepas on July 5, destined for the US West Coast.

An earlier fixture had shown India’s Reliance intending to charter the VLCC Desh Vibhor to lift a crude cargo from Sungai Linggi on July 1-10 and destined for the west coast Indian port of Sikka.

However, the deal did not materialize as recent shipping fixture records showed that Reliance has released the vessel.

Market participants indicated that the cargo is Abu Dhabi Murban crude which was sold to the oil major by Aramco Trading. Company sources from both firms declined to comment.

“[There are] huge amounts of [crude] floating, so if you can profit now and move ahead of everyone else, do so, as a lot of time charters [are] finishing in October and December,“ the crude oil trader said.

Backwardation flip

The sale of barrels from storage comes at a time when front months Dubai futures inter month spreads have flipped to backwardation, a market state where prices in the prompt months are higher than the latter months, after four months of being in contango.

A backwardated market state makes for less attractive storage economics.

“[Sellers can] basically make a lot of money on the unwind for the inverted market [structure],“ a Singapore-based crude trader said.

The M1/M2 Dubai crude futures has largely sustained its move into backwardation since June 8, rising to a five month high of 39 cents/b on June 19, the highest since Jan. 30 when it was assessed at 43 cents/b, Platts data showed.

The M2/M3 spread flipped into backwardation for the first time in three months on June 19, when it was assessed at a backwardation of 10 cents/b.

The intermonth spreads have risen after the OPEC+ alliance agreed to a one-month extension of the deeper production cut of 9.6 million b/d to July, following commitments from Iraq, Nigeria, Angola, and Kazakhstan to compensate after failing to fully comply with their cuts.

In addition, the alliance has increased pressure on these over-producing countries to comply with the deal, with the compensatory cuts expected to be made over July-September in addition to their set quotas.

Similarly, physical front-month cash Dubai has strengthened against same month Dubai futures, with the spread rising to a five-month high of $1.31/b premium on June 18, Platts data showed.

For June to date, the spread has averaged a premium of 75 cents/b, up from minus $2.73/b for the whole of May and up from a multi-year low of minus $9.15/b in April, the data showed.

OSP uptick

The uptick in official selling prices as issued by Middle East producers earlier this month has also made it attractive for sellers to sell their stored barrels which they may have purchased when prices were set at record lows earlier at the beginning of the second quarter, trade sources said.

The OSP differential for Abu Dhabi’s Murban crude, for example, has risen from a record low of $6.95/b against Platts Dubai crude assessment for May loading barrels to a premium of $1/b for July loading cargoes, Platts data showed.

Meanwhile, front-month cash Dubai has almost doubled from an average of $20.387/b in April to an average of $40.675/b so far in June.

“For the Middle East crude barrels, OSPs [were] up huge, so it is a great return [for sellers],“ said a crude trader with a Western trading house.

Traders indicated that allocation cuts received by Asian term lifters earlier this month for July loading cargoes from Middle East producers Saudi Aramco and Iraq’s State Oil Marketing Organization could have also supported the demand for the stored barrels.

Market participants had indicated cuts of up to 20% for Saudi barrels and up to 50% from their contractual levels for Iraqi barrels loading in July.

“[Sellers] were looking at the relatively tighter supply situation, and [they were] trying to test the market as well,“ a crude trader with a North Asian company said.

With some of the stored barrels released and sold into the spot market for prompt loading, trading activity for the August-loading cycle has come to a halt as Asian refiners have largely filled their requirements.

“A lot of demand was met [from the sale of the stored barrels]. At this stage, sellers [may be] forced to move [but] if they all try in one go, then the market will crash,“ the Singapore-based crude trader said.

Due diligence

The deep contango structure earlier in the year had incentivized companies to charter crude tankers for a period of between three to six months for use as floating storages, trade sources said.

At the time, time charter costs for a 2 million barrels loadable VLCC were at around $100,000-$120,000 per day for three and six months where the vessels were delivered in Asia, mainly in Singapore-Malaysia range, according to shipping sources.

Now, the economics of floating storage have passed their peak as lower freight rates have been more than offset by narrower spreads, Platts Analytics indicated.

Vessels which were taken by charterers under the short term time charter in February-March should soon be released into the market, a VLCC owner said, adding that these vessels were more likely to carry crude from the Middle East.

Tankers that were chartered from the end of March to May were most likely to carry lighter crude oil grades from the West and could be harder to sell in the current market, the owner said.

Shipowners advised to follow due diligence

Shipowners have to exercise due diligence to ensure no Venezuelan origin crude in the floating storage is loaded onto their vessels.

In June, the US Treasury sanctioned six shipping companies and their crude tankers for continuing to facilitate oil trading with Venezuela.

The VLCC and Suezmax tankers freight rates have already started to take a dive with tonnage gradually accumulating amid the deep OPEC+ cuts, according to a shipbroker.

And with most vessels that were locked in time charters expected to return to the spot market soon, the tonnage surpluses in the tanker marker could further worsen.