By SARAH KENT and GEORGI KANTCHEV
The supertanker TI Oceania was built to ferry vast quantities of oil across oceans but for the next year it is expected to remain firmly anchored off the coast of Singapore, storing millions of barrels of oil for giant trading house Vitol SA.
According to shipbrokers and analysts, the 3-million-barrel megaship–one of the largest in the world–is just one example of a growing trend that sees traders seeking ways to turn a profit in the slumping global oil market. The strategy is simple: buy and store oil at cheap prices now and sell futures contracts to lock in the higher oil prices expected later.
“It is one of the easy ways to make money and that’s one of the interesting things about it from a trading perspective: it’s a counter cyclical source of profit for the Vitols and Glencores and Trafiguras,” said Craig Pirrong, a finance professor at the University of Houston, referring to a handful of the biggest oil traders in the world.
According to data gathered from ship brokers and analysts, major traders including Vitol SA, Gunvor SA, Trafigura Beheer BV and Koch Supply & Trading Co. Ltd have chartered supertankers capable of storing a combined total of more than 30 million barrels of oil–many of them in the past few weeks. Vitol, Gunvor and Trafigura declined to comment. Koch didn’t respond to requests for comment.
The opportunity to stockpile oil in such large quantities has come from the dramatic shift in the commodity’s market in recent months. Since June, prices have collapsed, tumbling by more than 50% amid soaring production from the U.S. and unwavering output from the Organization of the Petroleum Exporting Countries, at a time when global economic growth and weak demand is slowing.
The oversupply has given rise to contango–when the current price of a commodity is lower than prices for delivery in the future. That makes it attractive for buyers to purchase oil now at the cheaper rates, store it and strike sales agreements at a higher price in the future, locking in profits.
The price difference between the March and August contracts of international benchmark Brent crude oil is currently $6 a barrel, the steepest premium since a previous oil price slump in 2008/2009.
For years, oil trading houses have contended with high prices and low volatility that have squeezed margins and pushed the firms to invest in infrastructure like oil storage tanks, terminals and refineries to give them more flexibility as well as market insight. Owning a refinery gives traders flexibility when trading and can also give them better insight into demand. Combined with their access to the physical oil market, these investments have made them uniquely well-positioned to exploit the shift in the market and store oil for a profit.
Swiss-based commodities’ titan Glencore PLC and one of the world’s largest independent oil traders, Trafigura Behee, have both already highlighted to investors that the market’s dramatic change since June is expected to bolster their profits.
Onshore storage tanks are also filling up fast. Major global terminals such as South Africa’s Saldanha Bay are at 85% capacity. According to Citigroup Inc., China’s coastline storage facilities ran out of space as the country filled up strategic oil reserves last year. Stocks at the U.S. storage hub at Cushing, Okla., have risen more than 20% since December, according to Kentucky-based data provider Genscape Inc.
That means more unusual storage options, such as the ships, are becoming increasingly popular.
“Because so much oil doesn’t have a home right now, there is a frenzy of traders and companies looking to hire supertankers,” said Halvor Ellefsen, chief executive of London-based shipbroker, Galbraiths.
The last time there was a similar situation, in spring 2009, more than 70 million barrels of oil were stored in tankers, according to ship brokers.
The current tanker craze may not quite reach those levels, as the disparity between current and futures prices isn’t as steep at the moment. Bank of America Merril Lynch predicts the volume of oil stored on tankers could rise to 55 million barrels by the end of the second quarter.
However, the potentially lucrative storage game isn’t open to everyone, nor is it risk free. It requires detailed knowledge of the way oil is moved around the world that few outside a tightknit group of oil traders possess. Making a profit still depends on numerous complex factors, including freight and storage rates and, ultimately, finding a buyer for the crude.
“If people think the contango is some kind of magical way to make money they are incorrect,” said Benoit Lioud, senior research analyst at Swiss-based trading house Mercuria Energy Group. “Storing big quantities of crude oil is not an easy game. It’s not a game at all.”
–Costas Paris in London and Christian Berthelsen and Nicole Friedman in New York contributed to this story.
Write to Sarah Kent at email@example.com and Georgi Kantchev firstname.lastname@example.org