Betting on Low Oil Prices, Traders Buy Storage Capacity
Trading houses are betting on oil markets remaining oversupplied for at least two more years even as crude prices stage a recovery driven by early signs of falling production.
Traders such as Vitol, Gunvor and Glencore are looking to extend or lock in new leases on storage tanks for crude oil and refined products in key hubs as far out as the end of 2018, sources at storage firms and trading houses say.
Storing oil in a heavily oversupplied market has been a cash cow for traders and oil companies in recent years as markets bet that future oil prices will be significantly higher than current ones, in what is known as contango.
Ian Taylor, chief executive of top oil trader Vitol, said on Tuesday that "stocks of crude and products continue to build and these will weigh upon the market".
Like other traders, Vitol has invested in recent years in storage, and last August acquired the other half of its VTTI storage subsidiary for $830 million.
Oil prices have risen 30 percent since mid-February to around $40 per barrel, as global production shows signs of slowing, which has led to a significant narrowing of the crude contango despite a stock overhang of 300 million barrels.
Crude oil has found more of a balance in recent weeks through supply disruptions in Iraq, Libya and Nigeria.
But refined oil products have not followed suit. Gasoline and blending components have been quietly building, squeezing the amount of storage left in Europe. U.S. gasoline stocks, when adjusted for current consumption, are just at the top of their 10-year range.
Krien van Beek, head of sales at RVB Tank Storage Solutions, a tank storage broker in the Netherlands, said traders are seeking storage on 12-month leases for products such as gasoline and naphtha outside key hubs in northern Europe, Singapore and the United States.
"They are prepared to look at storage for the longer term because of the contango in the market but everyone is cautious about costs because we are at the top of the storage market," van Beek said.
"Since the standard storage options are taken, traders are considering less conventional and less attractive locations."
According to RVB, global commercial tank capacity is around 900 million cubic metres across 4,400 facilities - not including "captive tanks" in refineries that are not open to commercial buyers.
This chimes with the International Energy Agency's view that a "hinge point" in the market, when demand surpasses available supply, will not begin to draw down stocks in earnest until 2018.
"We still see an oversupplied market, just not so much as it was before," said Andrew Wilson, the IEA's oil market analyst in charge of stocks and prices.
A key choke point, however, is forming in middle distillates - the diesel used to power trucks and generators, and the heating oil that warms homes around the world in winter.
Typically, these stocks fall over the winter. But warm weather this year kept this from happening - all while refineries worldwide ran full steam to feed seemingly insatiable demand for gasoline in the United States, China and India.
Global distillate stocks in the developed world are close to a record high, in the thick of refinery maintenance season, and in the run-up to the time when gasoline use hits its summer high point, but interest in diesel typically fades.
"Absent run cuts, the market faces another round of rapid stockbuilds once refineries return from maintenance," Robert Campbell of Energy Aspects said in a note.