Product Tanker Could Soon Be Used for Storage
Product tankers could soon be used for floating storage units, as the market is starting to exhibit certain undeniable trends supporting the case for using ships for storage of fuel oils. In its latest weekly report, shipbroker Gibson said that “much of the current market focus is on crude supply, with sanctions, outages and unplanned disruptions impacting on supply. But with IMO2020 just around the corner, fundamental changes in the products market are afoot, with the market dynamics set to drastically shift as we move closer to the end of the year. The market for middle distillates (primarily gasoil, diesel and jet fuel) could be set for a seismic shock – in stark contrast to current market fundamentals”.
According to Gibson, “at present the forward structure for ICE gasoil shows backwardation until July, with a contango setting in from August onwards. The shape of the curve can be explained by short term fundamentals. Continued refinery turnarounds are likely to constrain short term supplies, with notably lower exports from the Baltic expected for May. European refinery runs may also see some impact from crude supply issues, owing to contamination of Russian crude, whilst colder than usual weather could support prompt demand. However, the conclusion of European maintenance season will soon see supplies boosted, whilst higher inflows from the United States can also be expected, depressing forward pricing. Beyond this, the focus shifts to positioning for firmer demand emerging towards the end of the year, justifying the contango structure which emerges in the third quarter”.
Gibson added that “of course, when talking about contango, the shipping market tends to focus on the prospects for floating storage. Given that the market structure of ICE gasoil is backwardated for the new few months, floating storage is unlikely to be a feature of the market over the next quarter. However, looking further ahead, the ICE gasoil spread between July and October shows a contango of $5/tonne. Whilst forward storage rates are uncertain, and Q3 typically sees LR2 rates firm, even at a conservative estimate, such a contango is unlikely to support storage economics at this stage. Simple calculations suggest that at a daily rate of $18,000/day, a contango of at least $11/tonnes over three months would be needed to justify such a play, considerably short of where the curve currently sits. However, the current structure is unlikely to be preserved. As refineries exit maintenance over the current quarter and runs increase into Q3, the current contango in gasoil prices may steepen as increased supply depresses prompt prices, whilst increased focus on end of year demand supports the back end of the forward curve. Whether or not the futures structure becomes steep enough to justify storage remains to be seen, with freight costs also expected to firm over the same period. LR2s will always be the obvious candidate for this; however more favourable economics may emerge for newbuild crude tankers (VLCCs and Suezmaxes), where improved economies of scale may be achievable, depending on the level of demand for fuel oil storage and crude tanker fundamentals at the time”.
Gibson concluded that “outside of Europe, forward pricing in the key trading hubs of Singapore and New York Harbour show a modest contango all the way to the end of the year, although the scale is unlikely to justify significant floating storage play in the short term. However, just as in Europe, product supplies will increase post turnaround season, putting downwards pressure on prompt prices. With Singapore being the world’s largest bunkering port, demand in the region is expected to change significantly towards the end of the year, perhaps creating storage opportunities for product tankers to capitalise on, even if the window of opportunity proves to be short”.
Nikos Roussanoglou, Hellenic Shipping News Worldwide