Oil prices crashed after Russia and Saudi Arabia announced that they will abandon OPEC production quotas and open the taps, and while drillers and oilfield service companies are feeling the pain, the world’s largest oil traders are eyeing huge profits. After all, volatility is a trader’s best friend.
Oilprice.com’s Alex Kimani wrote back in January that the world’s 5 largest oil traders made a killing in 2019 by trading catalysts that created worldwide supply disruptions such as the contaminated crude at the Druzhba pipeline in Russia and the attacks on Saudi Arabia’s key oil facilities in September.
While 2019 proved to be a rocky year for oil, 2020 has started off even more volatile, with the coronavirus slamming the brakes on global demand growth and the collapse of the OPEC talks leading to the worst oil price crash since 1991.
While producers stand to lose billions of dollars in revenue in what is beginning to look like a race to the bottom, the world’s oil traders are playing the trend by scooping up cheap crude and storing it to sell at a later date.
Saudis Arabia’s steep oil price cuts last weekend marked the beginning of a major contango play after Riyadh slashed prices for its April Arab Light crude contract by $6 per barrel for Asian markets, while Northwest Europe and the U.S. saw discounts of $8 per barrel and $7 per barrel respectively. The price drop that followed has led to the widest prompt contango in the last four years, with the spread between Brent crude for 1 and 2-month deliveries now approaching $1 per barrel.
Image Source: Reuters New, Refinitiv Eikon
The cheaper crude will undoubtedly lead to improving profit margins for battered Asian refiners, but most of the additional crude flowing onto the markets will directly go into storage. An oil trader in the Mediterranean region told Oilprice.com that his company among others is ‘’rushing to fill every cubic meter of storage, with everyone in the region, including Central Europe looking for storage capacity’’.
Traders are taking advantage of a unique situation that has been created by temporary demand weakness caused by the coronavirus, plus the dumping of millions of extra barrels per day by Saudi Arabia, Russia, and the UAE.
Oilprice.com data shows that the 6-month Brent futures spread now amounts to US$4.95, giving traders the option to directly lock in forward prices and make a profit.
With onshore oil terminal space filling rapidly, oil traders have started to store crude on tankers. Shipbrokers told Reuters on Tuesday that ‘’The cost of renting a VLCC, which can carry 2 million barrels of crude and can be used for floating storage, was assessed Tuesday at around $38,700 per day, compared with around $30,700 per day on Friday and $14,800 a month ago’’.
The run on tanker storage is actually a blessing for shipping companies who are reeling from the coronavirus impact on commodities and industrial products. Related: Why 2030 Isn’t The Magic Year For Electric Vehicles
Seatrade Maritime News quoted New York-based shipbroker Poten & Partners as saying that “Floating storage will be profitable if the 12-month spread is higher than the cost of the vessel and the interest charges for storing the crude,” adding “We are not there yet, but the economics are moving in the right direction.”
Close to zero interest rates have been instrumental in the financing of such deals as oil traders are often taking out large loans to finance these storage deals. Bloomberg notes that Shell trading financed its 2016 contango trades with around $1 billion in loaned capital.
Looking forward, the contango could be set to deepen in the next couple of days, as Saudi Arabia asked state-owned oil giant Aramco to ramp up its production capacity from 12 million bpd to 13 million bpd, in what looks like an attempt to flood the markets with even more crude.
As the pain for oil drillers continues to get worse, oil traders are looking to bank profits.
By Tom Kool for Oilprice.com
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