Prices for oil futures have jumped by almost a quarter since April, lifted by severe supply disruptions caused by triggers such as Canadian wildfires, acts of sabotage in Nigeria, and civil war in Libya.
Yet flying into Singapore, the oil trading hub for the world’s biggest consumer region, Asia, reveals another picture: that a global oil glut that pulled down prices by over 70 percent between 2014 and early 2016 is nowhere near over, and that financial traders betting on higher crude oil futures may be in for a surprise from the physical market.
“I’ve been coming to Singapore once a year for the last 15 years, and flying in I have never seen the waters so full of idle tankers,” said a senior European oil trader a day after arriving in the city-state.
Red dots show the backup of anchored and slow-moving tankers off the coast of Singapore. Image courtesy of ZeroHedge
As Asia’s main physical oil trading hub, the number of parked tankers sitting off Singapore’s coast or in nearby Malaysian waters is seen by many as a gauge of the industry’s health.
Judging by this, oil markets are still sickly: a fleet of 40 supertankers is currently anchored in the region’s coastal waters for use as floating storage facilities.
The tankers are filled with 47.7 million barrels of oil, mostly crude, up 10 percent from the previous week, according to newly collected freight data in Thomson Reuters Eikon.
That’s enough oil to satisfy five working days of Chinese demand, suggesting recent supply disruptions – which have mostly occurred in the Americas, Africa and Europe – have done little to tighten supply in Asia as Middle East producers keep output near record volumes in a bid to win market share.
“The volumes of oil stored at sea in South East Asia – predominantly Singapore and Malaysia – appear to have increased significantly,” said Erik Broekhuizen, Global Manager of tanker research and consultancy at New York-based shipping brokerage Poten & Partners. “The current volumes are the highest for at least the last five years.”
Many participants in the physical market dispute recent notes from financial players like Goldman Sachs that forecast a further rise in crude futures.
“There has been quite a bit of bullishness from hedge funds in recent months, betting on higher oil prices, and even the analysts at Goldman Sachs have recently turned more bullish on oil prices,” said Ralph Leszczynski, head of research at ship broker Banchero Costa.
“Prices are unlikely to rise too much as the specter of glut is still there,” he said.
STORING AT A LOSS?
In fact, the need to store oil is so strong that traders are calling up banks to finance storage charters despite there being no profit in keeping fuel in tankers at current rates.
“We are receiving unusually high amounts of queries to finance storage charters,” said a senior oil trade financier with a major bank in Asia.
“These queries come from traders fully aware that they will not make a profit from storing the oil. This isn’t a trade play, it’s the oil market looking for places to store unsold fuel,” he added.
A trade financier at a European bank said there had been a “spike in interest from oil traders to finance their storage needs” since the start of the year as onshore facilities were almost full.
Both bankers declined to be identified as they are not allowed to speak to the media.
Storing oil on ships can be profitable when prices for future delivery of crude are higher than in spot market, a term structure known as contango, as long as future prices are high enough to offset tanker charter costs.
But the one-year contango for Brent crude futures has collapsed from $7.60 per barrel in January to just $4, far below the $10 that traders say is currently required to make floating storage financially attractive.
At a charter cost of more than $40,000 a day for a Very Large Crude Carrier (VLCC) that can store 2 million barrels, the contango is nowhere near steep enough to make it profitable to store oil on tankers for sale at a later date.
“Floating storage is unattractive economically, given the current term structure in crude futures,” BMI Research said this week.
Despite this, BMI said that “the volume of crude in floating storage has risen sharply in recent months,” adding that the phenomenon was global, with floating storage up 19.5 percent between the first quarters of 2015 and 2016.
“There is clearly still far too much physical crude going around for the glut to be over,” said the European oil trader after flying in to Singapore. “And the paper market seems blissfully unaware of it.”
(Additional reporting by Florence Tan; Writing by Henning Gloystein; Editing by Richard Pullin)
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