Oil's Crash Prompts Record Push to Store Fuel at Sea
May 03 2020 - 9:29AM
Dow Jones News
By Joe Wallace
The cost to ship gasoline, diesel and jet fuel around the world
has soared to record highs, as traders look to dodge the commodity
price crash by stashing refined oil at sea.
Charter prices for vessels that transport refined oil products
have tripled since the start of March, according to the Baltic
Clean Tanker Index, a gauge of freight rates along 11 shipping
routes. The index, calculated daily from estimates submitted by
shipbrokers, hit its highest level on record early last week before
slipping in recent days.
The coronavirus lockdowns deterred activities like driving and
flying that involve burning fuel. The resultant glut of oil sent
prices into a tailspin. But with so much extra supply, the price to
store or move oil products has moved in the opposite direction.
"The lack of on-land storage, surplus of supply and collapse of
demand globally means the oil is on the water, and it's moving long
haul," said Claire Grierson, head of tanker research at shipbroker
Simpson Spence Young. "We're seeing record levels on some of the
routes," she said of freight rates.
Last week, it cost just under $170,000 a day to charter a vessel
from the Persian Gulf to Japan, a busy route, according to Ms.
Grierson. That is a high for Simpson Spence Young's records and 10
times the rate in early March of $17,000.
Freight and commodity markets have a way of feeding on each
other. Because the prices for oil and oil products in contracts for
delivery down the road are higher than they are today, traders can
make money storing cheap oil today and cashing in on it later.
That creates more demand for tankers as traders are motivated to
keep oil at sea, especially with almost nowhere to store it on
land. Some vessels moving oil from Asia to Europe are skipping the
Suez Canal and taking the long route around Africa for this reason,
according to Erik Broekhuizen, head of tanker research at Poten
& Partners Inc.
At the same time, high tanker and storage costs put pressure on
spot or near-term futures contracts, since owning oil today is more
expensive. That dynamic played out in dramatic fashion in late
April when the price of near-term oil futures contracts went
negative for the first time in history as the cost to store oil
shot up.
Refiners, which distill thick crude oil into usable fuels,
haven't cut output fast enough to stop a surge in supply. Global
stockpiles of petroleum products will grow by around 550 million
barrels in the second quarter, according to the International
Energy Agency.
A race is under way to store the surplus gasoline, diesel and
jet fuel at sea. The number of available "clean tankers," smaller
ships that move refined petroleum products, has plummeted. "Dirty
tankers" transport unrefined crude.
London-based Signal Ocean Ltd. tracks the location of tankers
and where they could travel to if needed. As of Thursday, no Long
Range 2 vessels, the largest kind of clean tanker, were in a 15-day
range of Jubail, a port city on Saudi Arabia's east coast that is
home to a major refinery run by Saudi Aramco and Total SA. At the
start of March, 21 of the tankers were available.
"There are very few vessels left," said Semiramis
Assimakopoulou, vice president for sales at Signal.
Clean-tanker rates are expected to remain high. As refiners cut
production, unusual gaps will emerge in the price of oil products
in different regions, according to Lars Barstad, commercial
director of shipowner Frontline Ltd. in Norway. That will encourage
traders to buy oil where it is cheap, charter vessels, and move the
oil to places where they can sell it at a profit.
Logistical difficulties at ports pose further constraints.
Tankers are taking longer to unload because there is so little free
storage space on land. Coronavirus quarantine measures have added
to delays.
"There are bottlenecks everywhere," Mr. Broekhuizen said.
Write to Joe Wallace at Joe.Wallace@wsj.com
(END) Dow Jones Newswires
May 03, 2020 09:14 ET (13:14 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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