Deepening contango sparks US floating storage purchases

A deepening contango structure in crude futures has sparked US crude cargo purchases for floating storage after weeks of illiquidity in an oversaturated, low-demand global oil market.

WTI fob Houston widened its discount to June Ice Brent over the course of the April US trade month to a record low $8/bl by 23 March, or $21.29/bl. This was before trade activity picked up in the final week of the cycle as market participants sought to place cargoes in floating storage.

Market discussions had been muted since around 10 March as sellers struggled to place cargoes amid expectations of a hike in Mideast Gulf supplies starting April.

Several cargoes sold on 24 March at discounts to June Ice Brent circling $7.50/bl, staunching a nine-day downward price streak against the benchmark. The intermonth spread on that day between June and July Ice Brent had widened by 28¢/bl to $2.20/bl — more than covering the estimated $1.60/bl cost of storing crude on a very large crude carrier (VLCC).

Trade activity for US crude on a free-on-board (fob) basis at the US Gulf coast has continued at a steady pace since then. Spot prices continue to fall and the contango structure widens because of prompt oversupply of US and Mideast Gulf crudes, as well as reduced refinery demand amid stricter travel restrictions during the ongoing coronavirus pandemic.

Two more bookings

Shell and Hartree are the latest to book US crude cargoes for delivery to storage, each placing a VLCC on subjects today to depart the US Gulf coast for storage near Ningbo, China, in April and May, respectively.

Marathon Petroleum was expected to charter a Penfield-owned Handymax starting this week for 30 days of floating storage at the Gulf coast, according to shipping fixture reports. Shell is planning to charter the similarly sized Seaexpress for 60-90 days of floating storage offshore the US west coast starting at the end of March.

This suggests that floating storage may also be a strategy for Padd 5 crudes like Alaskan North Slope (ANS), or potentially western Canadian crude grades shipped to the US west coast via the Puget Sound pipeline.

Trafigura and Koch, both key players in the Corpus Christi market, were among the first confirmed companies to time-charter tankers for possible floating storage.

Trend could stretch to summer

June Ice Brent settled $2.94/bl under July Ice Brent today, to $27.95/bl, widening its spread by $1.33/bl week-on-week. August Ice Brent settled $2.38/bl stronger than July at $33.29/bl. This indicates it remains an economic strategy to store crude over the summer to sell later in the year.

The prompt discount to July Ice Brent has grown for six consecutive days as onshore inventories rapidly near capacity, pressuring the front end of the curve lower relative to forward prices. June-July Ice Brent has only been in contango since 4 March.

The trend may result in higher freight rates, as floating storage removes available tonnage from the transportation industry.

The rate to charter VLCCs from the US Gulf coast to China was assessed at $53.70/t yesterday, already up by $10.55/t since cargo buying for storage purposes became evident on 24 March. The trend is expected to continue near- to mid-term as producers and refiners alike flock toward storage opportunities in the current environment.

By Amanda Hilow