Floating storage plays on VLCCs aren’t expected in the near future

In Hellenic Shipping News 22/02/2016

Floating storage of WTI became feasible following the recent liberalizing of US crude exports. However, this hasn’t been translated into actual contracts and as it turns out this won’t be the case anytime soon. According to shipbroker Charles R. Weber, “in a theoretical floating storage contango analysis, we examined the profitability associated with storage on a non‐US flagged VLCC loaded via shore‐to‐ ship transfers on lightering tankers due the inability of VLCCs to directly call at the US Gulf Coast’s terminals which have been adapted to process export cargoes. Once factoring for the lightering costs, VLCC time charter costs for the relevant period, bunker costs, carry/capital costs, insurance and operational expenditures, we find that the WTI contango structure is sufficiently steep to maintain profitability through at least 12‐months from the front month, though profits peak at three months from the front month.

According to CR Weber, “despite the seemingly attractive value proposition implied, a number of key factors are likely to prevent such plays from materializing. Firstly, Jones Act restrictions prevent US crude stored or handled by non‐Jones Act compliant vessels to be redelivered to the US. One notable exception would be if the cargo is redelivered into the precise manifold at the same terminal from which it was loaded – in which case the floating storage itself would be considered as auxiliary or tertiary storage, rather than a movement between US ports. This method, however, would limit the ability to unwind the crude to buyers with direct reverse‐pipeline access to that manifold. Secondly, as WTI is cleared at Cushing, from which there are several distribution options to domestic refiners and storage facilities as well as export terminals, WTI crude purchased and held at sea would – due to the prior point – have essentially only foreign buyers in play to buy the cargo as its being unwound from storage, potentially rendering it significantly disadvantaged to WTI cargo settled at Cushing”, noted the shipbroker.

It went on to note that “for Brent crude, high VLCC rates and related floating storage costs wipe out any profitability for floating storage given an insufficient contango curve – and whilst oscillating futures curves have sporadically made floating storage profitable since 2H14, the extent thereof has consistently been insufficient to stoke significant interest. Usual risks and liabilities inherent to floating have been compounded by the commercial risk of volatile differentials between West African crude (a likely floating storage target) and the benchmark Brent prices they trade against”, CR Weber said.

VLCC

Meanwhile, in the crude tanker markets this week, “VLCC demand in the Middle East and West Africa markets was stronger on a w/w basis but gains in the Middle East failed to meet market expectations, given the passing of last week’s holidays in Asia and Latin America and industry events in London and their corresponding lull in demand. The Middle East market observed 25 reported fixtures (+92% w/w) while the West Africa market observed 7 (+17% w/w). Though Saudi stem confirmations materialized, those from the UAE were still being awaited. For its part, the West Africa market remained elevated and drew on Middle East positions, preventing negative pressure on rates from materializing. Additionally, participants expect that next week will be accompanied by further demand gains while vessel supply levels could prove tighter than they presently appear given rising discharging delays in China due to weather and ullage issues – and thus increasingly uncertain itineraries”.

According to CR Weber, “to‐date, 31 fixtures have been reported for March loading with all but one of these for first‐decade cargoes. A small number of additional first‐decade cargoes are expected to materialize while charterers are likely to progress more aggressively into second decade dates during the upcoming week. We project that in light of delays and with the West Africa market having been more active than previously anticipated, the number of surplus units at the conclusion of the first decade will likely tally at just 5 units. The relative tightness implied and with positions thereafter somewhat uncertain due to delayed China discharges, the combination of these factors with an active demand pace should support a stronger rate environment. This week, the AG‐FEAST route rose by 1.5 points to conclude at ws63”, the shipbroker concluded.

Nikos Roussanoglou, Hellenic Shipping News Worldwide