Despite a sobering week for the global crude oil market as the coronavirus or Covid-19 outbreak strangles the global economy, shipping rates for supertankers or very large crude carriers (VLCCs) – capable of shifting 2 million barrels – have gone through roof.
At 15:26 EDT on Thursday (March 12), the Brent front-month crude contract was down 7.60% or $2.72 to $33.07 per barrel while the West Texas Intermediate was down 4.73% or $1.56 to $31.42 per barrel. Both benchmarks are on average over 50% below their January peak, but oil shippers are seeing a remarkable reversal from having to contend with serious headwinds as recently as the first week of February.
Sources in Texas and Louisiana say lease rates for VLCCs are jumping on a "near daily basis", while shipping brokerage contacts in Singapore and Rotterdam say the scramble is on for a slice of a finite global fleet.
File photo of a row of VLCCs (very large crude carriers) berthed at a storage terminal on Jurong ... [+]
One source told your correspondent, the VLCC lease rate stateside is currently at $42,000 per day, up from $30,000 on March 6 (the day of the collapse of OPEC+ talks) and $16,000 on February 1, an uptick of 162.5%. "In our neck of the woods, much of the call on available VLCCs from fleets happen to be down to contango plays."
A contango market structure implies expectations that the futures price will be higher than the spot price, encouraging traders to store oil for a finite period hoping to sell it for higher prices further down the line.
Many players big and small are looking to "do a Gunvor", a famous contango play by the world's largest independent oil trader under its former co-founder Gennady Timchenko. The Russian billionaire's call back in 2008-09 resulted in a storage management master-class from Gunvor that yielded it over $600 million in profits.
As the oil price first spiked to $144 per barrel then plummeted to $37, and subsequently doubled when the financial crisis showed signs of receding, the company raked in handsomely via lock-ins taken in December 2008 with a six month forward sale.
However, the most lucrative plays for VLCC fleets are in Asia right now with a "barrage of calls" on the global fleet spot market by Saudi Arabia, says one trading contact in Singapore.
Saudi Arabian shipping company Bahri has tentatively chartered 19 VLCCs from the spot market to move Aramco cargoes with Riyadh pledging to pump 12.3 million barrels per day (bpd) from April 1; an increment of 3 million bpd on the restrained levels seen prior to the collapse of OPEC+.
What's staggering in terms of Saudi ambition is that Bahri, one of the world's largest tanker companies, already has 42 VLCCs of its own, according to a spokesperson. Shipping sources say such a "crazy call from a single major entity" has created its own spike, let alone any contango plays being conjured up by traders.
Brokerages say VLCC rates on the lucrative Middle East to China route jumped to a ballpark figure of $175,000 per day on Thursday (March 12), up from an average rate ex-Singapore of $22,500 per day recorded on February 3; an uptick of nearly 678% on the month. This is likely to go up as the United Arab Emirates and Kuwait ramp up their production unshackled by OPEC restrictions, with shipbrokers reporting inquiries from Abu Dhabi National Oil Company and Kuwait Petroleum Corporation.
Data aggregators point to 35 VLCCs booked for dispatches to Asia from the Middle East this week alone. While the jump in VLCC rates is much more pronounced for cargoes heading from the Middle East to Asia, much of the volume would also be heading stateside.
A third of the tankers leased from the spot market by Bahri are set to take cargoes of Arab light to the U.S., sources suggest, but both Aramco and the shipping company declined comment. None of this appears to be deterring determined traders.
Trading arms of oil majors Shell and Total, as well as traders Trafigura and Vitol have made inquiries on floating storage "though not all were for VLCCs," says a Houston-based contact. Additionally, Trafigura which is the biggest U.S. crude exporter handling about 600,000 bpd, is also looking to up its game of competing U.S. light sweet crude dispatches to Asia and Europe.
In February, it formed a joint venture with refiner Phillips 66 to build a major deepwater port in Texas - the Bluewater Texas Terminal located east of the entrance to Corpus Christi port - capable of handling VLCCs, ditching its own competing project. The company intends to "help the Permian region produce and export more crude oil, grow the U.S. economy and support Texan jobs."
Meanwhile, Louisiana Offshore Oil Port (LOOP) has already been handling VLCCs since February 2018, and more U.S. facilities, with 75 feet of depth required to handle supertankers in laden condition, are being planned.
With oil prices down ~50% since their January peak, it is hard to predict where this is going both in terms of the Saudis and others flooding the market, or pure contango plays. Be that as it may, the beleaguered shipping industry is primed to rake it in while volume is king.
