Companies Are Buying Oil Now to Sell Later When Prices Rise
The supertanker TI Oceania was built to ferry vast quantities of oil across oceans, but for the next year it is expected to remain anchored off the coast of Singapore, storing millions of barrels of oil for Vitol SA, a giant trading house.
The TI Oceania supertanker which is being used by oil trading house Vitol to store oil until the commodity’s price rises. ENLARGE
The TI Oceania supertanker which is being used by oil trading house Vitol to store oil until the commodity’s price rises. Overseas Shipholding Group
According to shipbrokers and analysts, the 3-million-barrel megaship—one of the largest in the world—is just one example of efforts by traders to turn a profit in the slumping global oil market. The strategy is simple: buy and store oil at cheap prices now, selling futures contracts to lock in the higher oil prices expected later.
“It is one of the easy ways to make money and that’s one of the interesting things about it from a trading perspective: It’s a counter cyclical source of profit for the Vitols and Glencores and Trafiguras,” said Craig Pirrong, a finance professor at the University of Houston, referring to a handful of the biggest oil traders in the world.
According to shipbrokers and analysts, major traders including Vitol SA, Gunvor SA, Trafigura Beheer BV and Koch Supply & Trading Co. Ltd have chartered supertankers capable of storing a combined total of more than 30 million barrels of oil—many of them in the past few weeks. Vitol, Gunvor and Trafigura declined to comment. Koch didn’t respond to requests for comment.
The opportunity to stockpile oil in such large quantities has come from the dramatic shift in the market for the commodity in recent months. Since June, prices have collapsed, tumbling by more than 50% amid soaring production from the U.S. and unwavering output from the Organization of the Petroleum Exporting Countries, at a time when global economic growth—the main determinant of demand—is slowing.
The oversupply has given rise to a so-called contango in the market, when the current price of a commodity is lower than prices for delivery in the future. That makes it attractive for buyers to purchase oil now at the cheaper rates, store it and strike sales agreements at a higher price in the future, locking in profits.
The price difference between the March and August contracts for Brent crude oil, the international benchmark grade, is currently $6 a barrel. That is the steepest premium since an oil-price slump in 2008 and 2009.
For years, oil trading houses have contended with high prices and low volatility, which have squeezed margins. Firms have responded by investing in infrastructure like oil-storage tanks, terminals and refineries to gain flexibility in trading, as well as better information about what is happening in the market.
Combined with the companies’ access to the physical oil market, these investments have made the trading firms uniquely well-positioned to exploit the shift in the market and store oil for a profit.
Glencore PLC, a Swiss commodity-trading giant, and Trafigura Beheer, one of the world’s largest independent oil traders, have both already highlighted to investors that the market’s dramatic change since June is expected to bolster their profits.
Onshore storage tanks are filling up fast. According to Citigroup Inc., China’s coastline storage facilities ran out of space as the country filled up strategic oil reserves last year. Stocks at the U.S. storage hub at Cushing, Okla., have risen more than 20% since December, according to Genscape Inc., a data provider based in Kentucky.
That means more unusual storage options, such as the ships, are becoming increasingly popular.
“Because so much oil doesn’t have a home right now, there is a frenzy of traders and companies looking to hire supertankers,” said Halvor Ellefsen, chief executive officer of Galbraiths, a London-based shipbroker .
The last time there was a similar situation, in spring 2009, more than 70 million barrels of oil were stored in tankers, according to shipbrokers.
The current tanker craze may not quite reach those levels, as the disparity between current and futures prices isn’t as steep at the moment. Bank of America Merril Lynch predicts the volume of oil stored on tankers could rise to 55 million barrels by the end of the second quarter.
However, the potentially lucrative storage trade isn’t open to everyone, nor is it risk free. It requires detailed knowledge of the way oil is moved around the world that few outside a tightknit group of oil traders possess. Making a profit depends on numerous factors, including rates for freight and storage and, ultimately, finding a buyer for the crude.
“If people think the contango is some kind of magical way to make money they are incorrect,” said Benoit Lioud, senior research analyst at Mercuria Energy Group, a Swiss-based trading house. “Storing big quantities of crude oil is not an easy game. It’s not a game at all.”
Plantagenet on Mon, 19th Jan 2015 4:19 pm
I was in southern Spain and I also visited Gibraltar over the xmas holidays. I counted 35 oil tankers anchored around Gibralter, all apparently storing oil.
GregT on Mon, 19th Jan 2015 6:12 pm
“apparently” storing oil.
Kind of like virtual reality?
Perk Earl on Mon, 19th Jan 2015 6:49 pm
Plant, you can tell by how low the ship is in the water as to it’s load. Were they low in the water?
If high in the water, it could be they are anchored awaiting oil price to rise again so they can go somewhere, fill up and deliver a profitable offload.
Plantagenet on Mon, 19th Jan 2015 6:57 pm
Thanks PeakEarl. Yes, the tankers at Gibraltar were low in the water. They were almost two dozen of them anchored in the harbor behind the Rock, and another dozen anchored offshore in the Straits of Gibraltar.
Its really beyond me why some people at this site can’t understand that speculators are storing oil in offshore tankers. I’ve been telling people this for weeks. Now the WSJ and other news outlets are repeating the same story.
FLASH—oil speculators are buying cheap oil and storing it until the price goes up. It happens every time there is a price downturn. And its happening now.
Get it now?
Makati1 on Mon, 19th Jan 2015 7:45 pm
The tanker owners like to get rents and not have to burn fuel to a port. If the glut/low prices persist for months/years and then not go up much, a lot of gamblers are going to get burned by overhead. Anyone do the math?
redpill on Mon, 19th Jan 2015 8:06 pm
Wow, so 30 of these super-ships could almost hold 1 days worth of oil consumption. Staggering!
If just one of these should have, whatya call it…oh yeah, an “accident”, gee but that might change some calculus. 3 million barrels, woof that fire would be visible from orbit.
Perk Earl on Tue, 20th Jan 2015 2:49 am
How often do you go to Gibraltar, Plant? How do you know the number of tankers there is not a regular pattern?
I think the idea of parking a ship full of oil and waiting for the price to go higher is in this case not a smart strategy. For one thing enough time is going to have to pass for the weak hands to fall out of the game, like LTO, which will be at minimum several months. Who can afford to park huge super tankers that I am sure are very expensive on a daily basis even if they aren’t burning fuel?
I can see parking oil super tankers like they did in 09 because there was a much smaller market to take the stuff as the world economy tanked, so there was no choice. But currently the consumption is higher than 09, it’s just a 1/2 off sale – lol.
Iraq is now churning out 4mbd, which at one time many thought would never go higher than 2.5mbd. Tar sands from what I’ve read continues to produce once some area is in production. The Saudi’s w/Opec as well as the Russian’s are not backing off, fully vested in this ‘Market Share War’. So this newly formed war of sorts may linger for a long time. Possibly for a year, i.e. unless consumption catches up to production and meanwhile those ships will just sit idle? I think not.
Davy on Tue, 20th Jan 2015 5:56 am
Perk, Rembrant on TOD had a post on the oil markets and how manipulated they are. There is a trading strategy that involves dark inventory in which tankers are used. Read the whole post if you have time. Here (bellow) is a quick look at some of the issues.
Keep in mind this is 2012 post in a different price environment but you get the point. Sophisticated trading strategies occur in the oil market. Sophisticated trading strategies are another word for corruption and manipulation.
“The Platts window is the most abused market mechanism in the world.”
“It will be seen that traders of the scale of the oil majors and sovereign oil companies do not really have to put much money at risk by their standards in order to acquire enough cargoes to move or support the global market price via the BFOE market. Indeed, the evolution of the BFOE market has been a response to declining production and the fact that traders could not resist manipulating the market by buying up contracts and “squeezing” those who had sold forward oil they did not have, causing them very substantial losses. The fewer cargoes produced, the easier the underlying market is to manipulate.”
“Due to the invisibility of the change of ownership of inventory ‘information asymmetry’ is created where some market participants are in possession of key market information which others do not have. This ownership by investors of inventory in the custody of a producer has been termed ‘Dark Inventory’”
“You can’t have proper price discovery when half of the inventory is being sold elsewhere at a different price. On exchange physical doesn’t even exist. Futures are converging to physical, but only the physical which is visible for Platts assessment.”
http://www.theoildrum.com/node/9742
rockman on Tue, 20th Jan 2015 7:41 am
And just the reminder that the oil warehoused in tankers is an insignificant volume as far as the global market is concerned. But very significant if you’re the one who owns the 3 millions bbls of oil in such a tanker and can net an extra $5/bbl. But it’s also similar to playing any futures contract: one might lose a net $5/bbl depending on how long you hold that oil and how the market price changes.
But bottom line: the volume is so small it can’t impact the global price of oil.
agramante on Tue, 20th Jan 2015 9:02 am
Not only is it a relatively small amount relative to consumption, but I’d suspect that storing up oil when prices are low, to sell later when they’re high, isn’t exactly an innovative strategy. A good strategy, sure, but not exactly a newly-thought-up tactic. Furthermore, I think using the word “glut” to describe the current price slump is a bad mistake: the excess in supply isn’t much–according to the IEA, a little more than 1 mmbd. Take that figure for what you will, but it hardly indicates to me an era of superabundance. The price increase due to the OPEC embargo of the seventies was due to a production cut of less than 7% of global consumption, and the market’s only gotten tighter. Comparatively small fluctuations in supply–shale oil and Iraq–and comparatively small fluctuations in demand–whatever’s happening in China–can have outsized effects on price. The guys chartering tankers to store oil are just adopting a time-honored tradition of capitalism.
Plantagenet on Tue, 20th Jan 2015 9:51 am
Perk
This was my first time visiting Gibralter. I try to go to new places each trip. I also travelled in Southern Spain and Morocco on this latest journey. I’m up to 90+ countries now
I know it was unusual to have so manny tankers at Gibralter because it amazes me when I saw it and I talked to the Brits there about it.
Cheers!
Perk Earl on Tue, 20th Jan 2015 12:34 pm
Wow, Plant I’m astounded and envious of the number of and interesting destinations you are getting a chance to experience! Are you a travelling salesman or just super wealthy – lol?
My wife and I who live in CA have travelled a lot in recent years within the US, writing off trips that are for Business to NY, Kentucky, Florida, Pennsylvania, Michigan, Arizona and Texas. Now we need to generate some business in Europe to see those sights.
Ok, so it looks like oil is being parked in waters off of Gibraltar with the hope oil price will rise and the offload will produce more income, however it’s probably as Rockman writes; the volume is so small it can’t impact the global price of oil. Nonetheless it’s a strategy to try and get more for the oil, but I think it will be a failed strategy because the price will remain low too long to make much. In fact, just checked on price and the little it went up when Brent re-broke 50 a barrel, has been lost and it is now down to its previous recent low.
Thanks for the info. and link, Davy. Very interesting reading.
Now, I’ve got to get some work done even if we are self employed, which is very nice, particularly since it also does well. Just have to be able to motivate myself and right now this heater by the computer is a nice spot. Maybe one more homemade latte and a biscotti.
Davy on Tue, 20th Jan 2015 2:05 pm
Better than my situation Perk. I just took 4 dulcolax and in one hour I will start drinking golyltely. Tomorrow I get the big scope up the butt. The reason I bring this up folks is now is the time to take maximum advantage of our healthcare system and get all the routine checks done. I had the nuts ultra-sounded last month and I am in good shape there. I hate hospitals, doctors, and med bills but with a potential collapse coming best get your body fixed now.
bobinget on Tue, 20th Jan 2015 2:07 pm
HRH Plantagenet is telling us what he observed.
Fair enough.
During Cold War era, Soviet watchers would
read *Izvestia. Not for the actual content mind you but for who or what was missing.
*Izvestia, translated means “truth”. Who said Communists don’t love Irony?
We do the same today watching any government controlled media for what particular crisis is of most or least importance.
It comes as no surprise, Saudi media is totally and absolutely controlled. The current case of a Blogger putting forth a case for more transparency earned him 100 lashes $250,000 fine and ten years in the slammer. (obviously, KSA feels very threatened)
If Saudis or anyone wishing to make vivvid demonstrations of over-supply they could simply hire hundreds of tankers, fill them up to the brim, show em off for all to see.
The reverse has also happened. In early days of Iranian sanctions Iran stored oil in tankers but kept them, transponders off, in remote locations.
Currently I’ve been buying beaten down Canadian
oil companies with excellent legacy, proven reserves. It could be said I’m speculating. I’ll call it
gambling. Unlike traders taking options on millions
of contracts, I’m BUYING oil for pennies on the dollar.
Here’s another reason why…
On Monday’s news, Israel, (we warmongers can always count on Israel to come through in every crisis). anyway, a IAF helicopter killed a prominent
Iranian general along with the son of a previously assanated Hezbollah chieftain.
Doubtless, there will be serious blow-back.
Israel is praying. Hezbollah’s counter-attack may be heavy enough for casus belli or permission to kill hundreds of thousands of Iranians.
(Israel can’t, won’t, tolerate nuclear parity w/Iran)
Iran’s retaliation need not be on Israel proper. Iran has prepared to unleash Hezbollah, not on Israel proper or a few settlers but Saudi Oil distribution choke points.
Gas Pipelines going into Israel are another possible target.
Global chaos. Israel, not Hezbollah, or Iran will catch blame for what Putin planned from Jump City.
Perk Earl on Tue, 20th Jan 2015 5:47 pm
“The reason I bring this up folks is now is the time to take maximum advantage of our healthcare system and get all the routine checks done.”
Good point, Davy. I spent a bunch last year getting updated so to speak, medically. Then just as soon as the med. was done found out I need a crown replaced because of decay under the crown. Hard to imagine post collapse dental or med.
Regarding the meds, if you are having stomach/digestive trouble may I suggest taking ‘Essential Enzymes’. The body produces various things for digestion and enzyme production can wane with time. I highly recommend against other brands of enzymes. That brand is the only one that seems to work. Available at Amazon. Take two pills after each meal. They increase energy level too!
Best to you on your med. examination.