Analysis by Poten & Partners
According to Poten & Partners, 2015 seems to be off to a very good start for tanker owners. Rates are strong and the outlook appears favorable, at least for the next 6 to 12 months. There is an expectation that a significant number of large crude oil tankers will be employed in floating storage as a result of a widening contango in the oil markets. As these vessels leave the spot market, spot rates will experience another boost. Going forward, some of the key questions are:
- how much excess oil is in the market?
- where will it be stored?
- how long can this imbalance last?
- what happens next?
An important driver of the oil markets is the volume of the overhang, i.e. by how much does oil supply exceed demand? Fortunately, there are many experts that closely follow the oil market and forecast demand and supply balances. Most investment banks provide projections, as do OPEC, the International Energy Agency (IEA) and the Energy Information Agency (EIA) in the U.S. However, the forecasts of these pundits for 2015 vary widely (see figure 1). Global oil demand estimates range from 92.3 million barrels per day (b/d) to 93.4 million b/d, a difference of 1.1 million b/d! The projections for total oil supply show similar variations. The key to the oil balances is how much OPEC will produce relative to the call on OPEC (a proxy for how much OPEC production is needed to balance the market). This difference drives the level of stock building. Based on the projections in figure 1, average stock building in 2015 will range between 0.6 and 1.3 million barrels per day.
Where will all this extra crude go? By definition, the oil that is produced, but not consumed, will end up in storage, either on land or on tankers. While it is much cheaper to store crude oil on land (~$0.50/bbl/month) than at sea (>$1.00/bbl/month), anecdotal evidence suggests that land-based storage has already reached record levels and may be filling up to capacity. As a result, trading companies have started fixing 2 million barrel VLCCs on long-term charters with storage options. When land-based storage is full and stock-building continues at a rate of 0.6 1.3 million barrels per day, about one VLCC equivalent will be required every 2-4 days. By June of this year some 80 110 VLCCs could already be in use as floating storage under this scenario.
2015 Global Oil Production and Demand Forecasts
Sources: IEA, OPEC, EIA, I-Bank
Removing a significant portion of the fleet from a market that is already tight will cause tanker rates to go up even further, while oil prices need to come down significantly to maintain the required contango and keep the storage play profitable.
2015 Theoretical Global Oil Storage Scenarios
Sources: EIA, I-Bank, Poten & Partners
Poten, thinks it is unlikely that this stock building scenario will play out through the end of the year. At some point somebody somewhere will blink. While oil demand does react favorably to lower prices, Poten does not expect that demand will grow quickly enough to absorb the current excess supply of crude oil. Supply (either from OPEC or from other producers) will need to be taken off the market as well. Production cuts will likely lift oil prices and remove the incentive to store crude. As the storage vessels re-enter the spot market, tanker rates may come under pressure.
Source: Poten