"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 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."
Something
Stunning Is Taking Place Off The Coast Of Singapore
20
May, 2016
"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,"
-
Senior European oil trader a day after arriving in the city-state.
Back
in November, when the world-record crude inventory glut was still in
its early innings, we showed what we then thought was a disturbing
image of
dozens of oil tankers on anchor near the US oil hub of Galveston, TX,
unwilling to unload their cargo at what the owners of the oil thought
was too low prices.
* *
*
Little
did we know that just a few months later this seemingly unprecedented
sight of clustered VLCCs would be a daily occurrence as oil
producers, concerned by Cushing
hitting its operating capacity,
would take advantage of oil curve contango to store their oil
offshore indefinitely.
However,
while the "parking lot" off Galveston has since normalized,
something shocking has emerged and continued to grow half way around
the world, just off the coat of Singapore. This.
The
red dots show ships either at anchor or barely moving, either oil
tankers or cargo, which have made the Straits of Malacca, one of the
world's most important shipping lanes which
carries about a quarter of all seaborne oil primarily from the
Persian Gulf headed to China, into
a "bumper to bumper" parking lots of ships with tens of
millions of barrels in combustible cargo.
it
is also the topic of the latest Reuters
expose on
the historic physical crude oil glut which continues to build behind
the scenes, and which so far has proven totally immune to dissipation
as a result of the sharp increase in oil prices over the past three
months.
Indeed,
as Reuters notes, 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. And yet flying into Singapore, the oil trading
hub for the world's biggest consumer region, Asia, reveals another
picture: that
a global 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.
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
glut is not only constant but is rising with every passing week: 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.
What
is curious is that the glut is persisting despite seemingly
relentless demand by China. Earlier today Bloomberg calculated that
74 VLCCs are bound for China, the highest in 3 weeks, and up from 69
a week earlier. Still the inert glut off Singapore is 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."
What
is taking place in the oil market appears to be merely the latest
disconnect between the paper and physical markets, something quite
familiar to precious metals traders in recent years. As Reuters
notes, 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. However, Leszczynski may be discounting just how powerful
algo-driven momentum can be if, or especially when, it is completely
disconnected from fundamentals.
* *
*
While
the sight of tankers at anchor is nothing new, this time something
has changed.
Unlike
before, when the contango of the oil curve made storing oil offshore
profitable, this is no longer the case as contago-funded offshore
profits have all but disappeared.
As
a reminder, 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. However, with the one-year contango
for Brent futures collapsing 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, suddenly parking oil
offshore leads to storage losses. The same goes for WTI.
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.
This
has led to a dramatic development in the oil market: debt-funded
storage. Reuters writes that 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 dded.
So
why are the traders doing this?
Simple:
they hope that oil prices will rise fast and soon enough where the
capital appreciation in crude will more than make up for the
incurrence of new debt which will be repaid with proceeds from
"selling higher." The risk, of course, is that oil does not
rise and should prices tumble, traders will not only have a capital
loss on their hands, but be forced to deal with the excess leverage
they had hoped would promptly disappear.
To
be sure, while we have warned
in the past about
the danger of offshore storage becoming unprofitable and being
brought back onto the land market, in the process launching a
liquidation dumping scramble, it has never been this bad.
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.
Still,
with record amounts of oil stored offshore and with the profit on
such storage now shifting into a loss, many are scratching their
heads how much longer this imbalanced, and bank funded, situation can
persist.
"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.
The
trader's conclusion: "And the paper market seems blissfully
unaware of it."
He
is right... for now. Because all that will take for even the algos to
give up their relentless upward momentum, is for some of these tens
of millions of barrels to finally come onshore, which now that
contango is no longer profitable, is just a matter of time.
In
the meantime, just keep track of the unprecedented parking lot of
ships off the coast of Singapore: the larger it gets, the more
violent the price drop will be once banks say "no
more"
to funding money losing charters.
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 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.
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