Oil Storage Sinks as Price Bobs

Wall Street Journal ^ | Feb. 26, 2015 | ERIC YEP

[thackney]

Fewer oil tankers are being used to store crude than traders and shipbrokers had expected at the start of the year, as a recent run-up in oil prices upended a popular trading strategy.

“There were around 25 to 30 large tankers taken last month, but only around 10 of these are being used for oil storage now,” a Singapore-based shipbroker said, citing industry data.

Many market watchers had expected big commodity-trading firms to capitalize on the price gap between different oil-futures contracts by buying physical barrels, storing them on ships and locking in profits by selling futures contracts for delivery further out in the future. When the price of Brent crude, the global benchmark, sank below $50 a barrel in mid-January, its price for delivery in January 2016 was more than $60 a barrel.

But this month’s rally—Brent crude is up around 16% so far in February and is 32% higher than its 2015-low in mid-January—has made the bet less attractive. The difference between current prices and the price of Brent for delivery in about a year has narrowed from more than $10 to around $6 a barrel.

“Demand for oil tankers...is now minimal compared to the flurry we saw a few weeks ago,” the Singapore shipbroker said. “The evidence is that a number of shipowners are pushing to get their ships chartered for storage but there are no takers.”

The diminishing profitability of a highly touted trading tactic highlights the challenges traders face at time of heightened volatility in the oil market.

Traders looking to reap profits from the strategy first turn to tanks on land to store oil, because the costs to store there are cheaper. Leasing tankers is more expensive and can be justified only when the price gap is relatively wide and tanker rates are low...