Oil Traders Look for a Bonanza Like 2009By
The sudden collapse in oil prices has left the world awash in cheap crude. Analysts estimate that global production of excess oil—oil for which there is no immediate demand—is somewhere between 1 million and 2 million barrels a day. Oil traders are scrambling to find a place to store it all, leasing tankers at the fastest pace since the recession. With any luck, they’ll replicate a strategy that won them big profits in 2009, the last time oil was this inexpensive.
In 2008 oil prices crashed from $146 a barrel in July to $36 in December. Traders kept buying crude, but rather than sell, they sat on it and waited for prices to rebound. By the end of 2009, prices had almost doubled from their lows of a year earlier, and trading companies booked fat profits as they unloaded their stored oil. Gunvor, the world’s fifth-largest independent oil trader, made a record profit of $621 million that year, according to a company bond prospectus.
With oil prices down more than 50 percent since the summer, history is starting to repeat itself. Some of the world’s largest oil traders have leased ships, possibly planning to use them for storage. Vitol, Koch Industries, Royal Dutch Shell, and Trafigura have booked tankers that can be used to store crude at sea for one year, according to shipbrokers, agents who match lessors with renters of vessels. A Jan. 16 report from the International Energy Agency says that oil trading companies have already booked as many as 15 of the world’s second-largest class of oil tankers, known as Very Large Crude Carriers, each with enough capacity to store as much as 2 million barrels. “It looks more and more likely that you’ll see more floating storage, and it’s going to be good” for ship owners, says Eirik Haavaldsen, a shipping analyst at Pareto Securities in Oslo. “The re-emergence of floating storage is what could move the crude tanker market this year from being rather good to possibly very, very good.”
Shares of Bermuda-based Frontline, the world’s largest oil tanker shipping company, have more than doubled since Nov. 27, when OPEC announced it would not cut production to stop the slide in prices. According to Basil Karatzas, a shipbroker in New York, day rates tanker companies charge for VLCCs have roughly doubled since November, to as much as $90,000. That will lift average earnings in 2015 for VLCCs to about $39,000 a day, the most since 2010, according to analysts’ estimates compiled by Bloomberg and data from Clarkson, the world’s largest shipbroker. The Baltic Exchange in London, a futures exchange, reports that day rates for supertanker shipments from Saudi Arabia to Japan are up to about $82,000, the most for this time of year since at least 2009.
Traders are also looking for land-based tanks to stash crude. The amount of oil stored in Cushing, Okla., the biggest storage hub in the U.S., has risen more than 85 percent since August, to 33 million barrels. Shares of Rotterdam-based Royal Vopak, the world’s largest independent storage-tank operator, have risen 16 percent this year. “There is significant storage demand from traders wanting to cash in,” says Martijn den Drijver, an analyst at SNS Securities in Amsterdam.
Securing land-based storage is a lot harder than booking an oil tanker. As much as 90 percent of global oil storage capacity is “captive,” or controlled by major producers such as Royal Dutch Shell, BP, or Chevron, Den Drijver says. That means only a small portion of land-based oil storage is available for independent traders to lease.
It’s also not clear that the trade will be as profitable this time around, says Steven Kopits, an oil analyst at Princeton Energy Advisors (page 39). When prices bottomed in December 2008, traders were able to lock in futures contracts that allowed them to sell oil six months in advance for $11 more per barrel. According to the futures market, the price of oil in September 2015 is only about $6 more than what a barrel fetches today. If production falls even a little bit, current prices could rise faster than future prices, wiping out the opportunity to profit through storage. “There is still risk involved,” says Matt Lauer, a spokesman for Geneva-based Mercuria, the fourth-largest independent oil trading company in the world. “It would require only a 3 percent drop in the world’s oil production for this market to go away.”
—With Andy Hoffman, Rupert Rowling, Naomi Christie, and Alaric Nightingale
The bottom line: The collapse of oil prices gives traders a chance to buy crude, hold it in storage, and lock in a profit on the futures market.