Contango, supertankers and floating storage

Tanker mooring in Arabian Sea

STRAPLINE

Despite vessels deteriorating when kept stationary, supertankers are being employed to store oil offshore in bulk until the price of crude rises. There’s a mounting oil surplus as these giant sharks stockpile crude offshore. Benchmark Brent (for immediate delivery to the market) has plunged in value by 50% since June 2014.

Contango may seem like a gamble, but essentially it locks the big traders into risk-free profit on a valuable commodity in a volatile market. A Contango carry of just $8 a barrel for tankers containing 2 million barrels of oil ensures that the contents of the vessel will generate $16million per annum.

Chuckle as neoliberal media outfits and Unionist politicians declare that we – the  ‘loser Yes’ voters in Scotland’s 2014 Indyref – got the figures wrong. Witness the price of Brent crude oil six months on. It’s the economy, stupid.
 

Contango, supertankers and floating storage

Despite vessels deteriorating when kept stationary, supertanker carriers are being employed to store oil in bulk at sea until the price rises. Brent crude (for delivery now) has halved in market value since June 2014. Traders are exploiting the low price and glut of crude by utilising Contango, a market structure that allows the crude to be bought now and sold forward for later delivery. Technically market manipulation, Contango refers to a situation where traders are willing to pay more for a commodity at some point in the future than the actual expected price. Thus the spot price for immediate delivery is less than the cost for shipment down the road.

Commodity traders such as Vitol, headed by Scot Ian Taylor, already operate storage facilities, oil and gas terminals and pipelines. Low-cost, large-scale storage is now being enhanced by the use of oil tankers offshore. Demand for leased supertankers has increased. With cheaper spot-hire prices ($35,000 a day), ideal are the ageing supertankers: think of it like your old car, their fuel efficiency is poor. Analysts estimate that over 50 million barrels of oil will be kept offshore on chartered tankers by mid-2016. In total 400 million barrels of oil worth $22 billion will be stored onshore and in tankers. Dutch firm Vitol is the largest stand-alone oil trader in the world.  It has booked the TI Oceania, a carrier 380 metres in length that can store 3million barrels of oil: it has also leased the Maran Corona, which boasts a mere 2million barrel capacity. A contango carry of just $8 a barrel for supertankers containing 2million barrels of oil ensures the contents of the vessel will generate $16million over a year. Tankers that can hold a total of 15million barrels have been booked – a drop in the ocean compared to the 100million barrels stored offshore on carriers during the last contango in 2009.

Vitol owns 50% of VTTI, one of the world’s biggest independent energy storage businesses. Their partnership owns 400 storage tanks in Europe, Asia, the Middle East, and the United States, with a total capacity of 35.5 million barrels. Storage includes crude undergoing transportation – pipeline, tanker, barge and rail. (There has been a spate of derailments, explosions and fires in North America already in 2015.) Dutch-based Vopak is building a storage facility in Malaysia, adding to its existing portfolio of 89 terminals worldwide, which have a current total capacity of more than 195 million barrels.

Additional crude is being shipped to onshore tanks in the US. Futures markets reflect the state of oversupply. A large price spread encourages in-ground and offshore storage. At Cushing, Oklahoma in February 2015, oil stocks in tank storage have doubled and  there it costs only 50 cents a barrel to store oil, where tank capacity is 67%. Cushing is however unrepresentative as it is used for short-term tactical storage. West Texas Intermediate crude for March delivery is $51.69 a barrel. The same grade for delivery in March 2016 is $61.63 a barrel. As the price of crude stabilises and shows signs of recovery, as the profit play fades, it is less feasible to stockpile offshore.

The current oversupply of crude is 1.5 million barrels per day. OPEC member Saudi Arabia holds its share and the global market to ransom, ‘over a barrel’ with a current daily production rate of 10million barrels. Venezuela, Nigeria or Russia could respond to revenue shortfalls by shutting down their oil production, but why should they when Saudi doesn’t really care who stops production? US shale oil production has added 2 million barrels a day into the market. Even lower prices are needed for US output to slow enough to re-balance global markets.

Saudi Arabia pumped close to a record amount of crude oil in March 2015, leading the biggest surge in OPEC output in almost four years just as the U.S. shale boom shows signs of slowing.

There’s been a huge drop in rigs targeting oil, so production should soon begin to tail off. Spring refinery maintenance has lessened demand, although extreme cold in the US has boosted heating oil supply. Drilling is being throttled back in the US, and the nature of the shale industry makes it easier for companies to wait for a price recovery. For example, by drilling wells without completing them, shale oil is left stored underground until prices allow fracturing to be more profitable. By the end of March 2015 crude oil stockpiled in the US had reached 458.2 million barrels in total, the highest level since 1930. Crude oil production had climbed to 9.29 million barrels per day, a new all-time high.

Smuggling, sanction breaches, crude blending, cargo instability, tanker cleaning and other maintenance issues like hull fouling are minor problems – storage is risk-free when buyers for the commodity are willing to pay more in the future than the actual expected price. Ignore price rout and oversupply, it’s all to do with growth and surplus value: it rules (and ruins) our lives. There are no rules or regulations – it’s called neo-liberalism. We are in the same phase as in 2009. Contango changes how oil companies drill and sell oil in order to boost their profits. Oil traders are ecstatic, celebrating their best market since the 2008 oil price crash.

Though a steep contango can eat away at long-term returns, price fixing is like expenses claims and petty cash for oil traders, compared to lucrative upstream activities, shale plays and taxation issues, yet it helps pay for the lobbyists. And not just those calling for tax cuts, ignoring a barrel-load of issues – we must concentrate on renewables, we have no oil fund, no Scottish oil corporation, Britain’s tax on oil and gas company profits is the second lowest in the world, and 80% of the world’s supplies are owned by governments. The calls were predictably successful, as the pre-election UK budget on March 18th 2015 gifted new allowances ‘to encourage investment’, a Petroleum Revenue Tax cut from 50% to 35%, and a supplementary charge cut back to 20% from 30%. The oil majors continue to lay off or fire offshore and onshore contractors, and force the workforce to adopt 3 weeks on: 3 off shift patterns. Extended shifts will be implemented in the Brae, Beryl and Forties North Sea oilfields from April.

Attacks have intensified on oil company employees and contractors – on base and sick pay levels, stand-by payments, travel allowances and pensions. many oil workers still work day-rate without contracts of employment.

If you’re wondering what oil traders do with their pocket money, sometimes they finance anti-independence campaigns, shaving costs by attacking the pay and conditions of the workforce and then interfering in the sovereign affairs of their Nation. Breathtaking nerve, we allow it to happen: you couldn’t make it up. Then the neoliberal media outfits and Unionist politicians alike bleat that those who voted ‘Yes’ in Scotland’s 2014 Indyref – to take limited control of the Nation’s resources – got it wrong because of the subsequent low price of oil, and a bullying trader who financed Better Together’s ‘No’ campaign threatens to sue anyone who exposes the shenanigans. Vitol’s 2013 profits fell to $837 million on sales of $307 billion, the lowest since 2010: this dip was caused partly by problems faced ‘hedging physical cargoes in a volatile market’. In 2014, on sales of $270 billion, Vitol made a profit of $1.3 billion. Since 2010, besides his £0.5 million donation to Better Together, Ian Taylor has donated over £725,000 to the Conservative Party.

http://www.bloomberg.com/news/articles/2015-09-15/oil-traders-hire-tanks-on-tiny-island-to-profit-from-global-glut

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