Has Oil Storage Had Its Day?

Despite the fact that US oil inventories have hit record highs, there’s still hope that the glut could be starting to recede. In 2015 and 2016, the rise of floating storage only served to deepen the global supply imbalance. Now, analysts are increasingly confident that the market will be hit by tighter conditions. Just days ago, Reuters reported that traders are beginning to offload crude from floating storage tanks along the Gulf Coast. To optimists, this is an early sign that the supply glut is cooling off.

‘Contango’ cools off

Ships are one of the most expensive forms of storage, demanding logistics, manpower and infinite red tape. Now, experts are maintaining that storing crude oil for sale at a later date is no longer profitable.

In the past, a market ‘contango’ saw front-month oil contracts trade at a discount to oil futures of between six months and one year. Essentially, traders were able to strategically store oil and take advantage of anticipated time spreads. While this tactic has served traders well over the past few years, the futures curve has now flattened out and the ‘contango’ has all but disappeared.

For the trade scenario to work, the differential needs to be big enough to cover the cost of storage. But for many traders, this is no longer possible. As a result, some analysts are predicting that tanker storage could be on its way out.

Traders starting to sell-off

The trend is already gaining momentum in the Gulf Coast, with Reuters reporting that traders are beginning to unload and sell-off.

"Right now, traders aren't incentivised (to store)," explains Sandy Fielden, director of oil and products research at investment management company, Morningstar. "It won't all stampede out of the gate, but inventory levels will come down. What will happen is that some of it will go to refineries, but a fair amount will be exported too."

So has at-sea oil storage had its day? While some are preparing for the worst, others maintain that it’s impossible to predict whether the at-sea oil storage industry collapses over the next few years.

Once offloaded, controlling corrosion becomes a very real issue for refiners. For a closer look at how the industry works to maintain standards, ‘CONTROLLING CORROSION: A New Method to Measure the Acid Number in Crude Oil and Refinery Distillation Fractions’ spotlights how discounted opportunity crudes can serve as a lucrative way to improve margin spreads.