By Peter Lynch
Did
you know the Baker Hughes rig count is falling? Of course you did, it’s the
equivalent to talking about house prices in oil circles. Yet US production
growth hasn’t so much as stuttered since the Saudi’s decided US shale should
just settle down, why? We think readily
available storage, both fixed and floating, is supporting spot oil prices
beyond the fundamentals as traders profit from the ‘contango’ in the oil
futures market, buying spot, adding to storage and selling forward ~ VLCC
tanker rates have reached levels not seen since 2008 as traders build a
flotilla of floating crude storage.
Time though, could be running out for this trade as global oil stocks progress towards capacity limits both in Europe and the US. We suggest a growing lack of available storage capacity could call time on the recent financial life support in the oil markets, leaving spot prices to reflect weak underlying demand and a burgeoning overhang in storage. As a result we would caution buying the recent equity rally in oils, fuelled by pricing recovering to over $60/bbl, we would also recommend exposure to oil storage capacity and crude tanker rates, either through derivatives or direct equity in VLCC tanker operators.
Time though, could be running out for this trade as global oil stocks progress towards capacity limits both in Europe and the US. We suggest a growing lack of available storage capacity could call time on the recent financial life support in the oil markets, leaving spot prices to reflect weak underlying demand and a burgeoning overhang in storage. As a result we would caution buying the recent equity rally in oils, fuelled by pricing recovering to over $60/bbl, we would also recommend exposure to oil storage capacity and crude tanker rates, either through derivatives or direct equity in VLCC tanker operators.
Brent futures curve ~ steep contango encourages adding to storage
Source: Bloomberg
Available storage supporting spot prices for oil
We see storage as acting as life support for
near-term oil prices since the precipitous collapse in late 2014. Despite spot prices having traded below $50/bbl
the futures strip has remained in steep contango….with forward prices two years
out being sustained in the $70-$80/bbl range….supported by the oil industry
acting in unison to announce capex cuts in response to low pricing. As a
commodity trader, If I’m buying spot and selling forward on the same day,
effectively taking no risk and booking the spread, I’m hugely dependent on
available storage to execute this trade. Hence when storage capacity is full…no
more traders buying spot…..spot falls to the level of fundamental demand, not to mention prices reflecting the physical
overhang of stocks being full at that point….ouch.
US Crude oil stocks continue to build aggressively
Rising VLLC tanker rates likely to indicate storage is filling in Europe
On the basis of the chart
extrapolating the build in US stocks shown below, the hard limit of US storage
may be approaching, note WTI now trades at a $10 discount to Brent at c$50/bbl
reflecting a relative oversupply in the US market. In Europe, stock levels are
more opaque, added to this availability of floating storage ….i.e. the number
of tankers available to sit idle on the water holding crude…hence timing the
crunch point is even harder to call than in the US. Whilst forecasting the
point at which stocks in Europe reach capacity may be harder than in the US,
signs that stocks are filling should be clear to see, falling spot prices for
Brent will be an indication the process adding to storage is becoming more
difficult, though an earlier indication is likely to come in the form of rising
VLCC tanker rates, as tankers are removed from the fleet to sit idle holding
crude, squeezing rates at the margin. According to Teekay shipping, VLCC (Very
Large Crude Carrier) rates are now at their highest since 2008, with 30 vessels
moving onto time charter with storage in January, this looks set to continue.
West Africa to US Atlantic route, VLCC tanker rates over $60,000/day
Source: Bloomberg
Hard
limits on storage to withdraw financial demand for crude
Storage levels
continue to build on both sides of the Atlantic whilst VLCC tanker rates have
reached levels not seen since 2008. We suggest the lack of available storage
capacity could be about to call time on the recent financial life support at
play in the oil markets. As a result we would caution buying the recent equity
rally on the back of recovering oil prices, we’d also recommend gaining
exposure to available oil storage capacity or even better, VLCC tanker rates,
either through derivatives on tanker rates, or direct equity in VLCC tanker
operators, as storage is likely to trade at an
increasing premium the closer to capacity we get.
Another storage
mechanism in the US marked by its absence from current debate is the US strategic petroleum reserve (SPR). My outside bet
is if conventional and floating storage fills to capacity, and spot prices
crater as a result, the US government could justify stepping in to add to its
reserve.…again supporting the market and its own shale industry.
No comments :
Post a comment