The amount of crude stored on tankers is showing signs of a slight descent in response to the waning economics for storage as production cuts and a measured demand recovery aids a rebalancing of the global oil market.
The slowdown in storage is already starting to have a significant impact on spot freight rates.
Rates on VLCCs have plunged dramatically in the past month as a gradual fall in floating barrels prompts an influx of tonnage which has coincided with fewer spot crude cargoes due to the OPEC+ production cuts, sources and industry analysts said.
Floating storage reached its peak earlier this month but with demand recovering, some of the storage is being emptied out, which has helped push oil prices near four-month highs this week.
VLCC rates plummet
This trend can be best illustrated by looking at the VLCC market, which is the main tanker segment holding storage barrels.
Freight rates for a West Africa-East voyage, carrying a 260,000 mt cargo, crashed to an 11-month low this week, according to S&P Global Platts data.
Rates on this voyage were assessed at Worldscale 40 or $14.41/mt on June 23, the lowest since late July last year.
This rate was as high as $75.64/mt on March 16, at the peak of the Saudi-Russia oil price war, when oil prices collapsed due to the COVID-19 pandemic.
“VLCCs are finally taking the plunge,” said a shipbroker, pointing out that the weakness in the other segments had finally reached the larger tankers. “It is absolutely plummeting.”
Freight rates for Suezmaxes and Aframaxes have also dropped sharply in the past month and rates are in some cases very close to or just below operational costs for tanker owners.
“The direction of spot rates will now be dictated by how quickly vessels engaged in floating storage are returned to active trade and the timing and magnitude of the reversal of the OPEC+ production cuts implemented in May,” S&P Global Platts Analytics said in a recent note.
Storage winding down
There are currently close to 190 million barrels of crude on floating storage compared with 200 million barrels earlier in the month, according to data from Platts trade flow software cFlow. The data estimates the volume of oil on tankers that are idled offshore for seven days or more.
The amount of oil on floating storage has not yet fallen sharply despite modest signs of a demand recovery.
But with the oil market structure flattening and in some cases briefly moving from a contango into backwardation, more barrels are expected to come out of storage in the coming weeks, sources and analysts said.
In a backwardated market, the forward price of oil is below the prompt price, inferring strong prompt demand and a tightly supplied market, discouraging storage.
Alphatanker, a market analysis division of shipping brokerage BRS, said the floating storage drawdown will not be immediate and could take over six to nine months.
“It looks as though crude tanker demand, and thus rates, will remain lower for longer as refineries draw down their inventories and operate well below the record levels attained at the end of last year,” Alphatanker said in a recent note.
Oil on water
West African crude, which makes up a decent share of oil on floating storage, has seen its storage volumes fall steadily this month.
Sources said stronger prompt demand along with a more volatile Dated Brent structure has encouraged many traders to sell the WAF crude that was being stored on tankers.
Energy research firm Kpler estimates that floating storage volumes were as high at 199 million barrels for the week beginning June 22, the largest ever volumes for crude on floating storage.
Some of the increase in storage is being attributed to the multitude of logistical bottlenecks afflicting ports the world over.
But Kpler data also showed that oil on water has fallen sharply in the past month as OPEC+ production cuts along with involuntary production cuts from the US, Canada, Brazil and Norway are making their presence felt.
Oil on water, which includes the total volume of crude and products on tankers, was estimated to be around 1.15 billion barrels for the week beginning June 22, according to Kpler data.
This is a sharp fall from the week beginning May 2, when oil on water was at a record high of 1.30 billion barrels.