DOE Review: All told, total crude oil inventories in the U.S. as of Friday, March 27th ballooned to a record 1.07 billion (x109) barrels. That equates to approximately 118 days of import cover (the IEA requirement is 90 days). In other words, there was no change last week… you still can’t swing a cat without hitting a barrel of crude oil in the United States.
As such, the futures markets, both in London and New York are behaving accordingly, i.e. spot barrels are being discounted. That is the clearest signal possible that seasonal demand, relative to supply is (and will remain) weak.
For instance, new floating storage stories have again surfaced (pardon the pun). According to a story on Bloomberg over the weekend, Vitol recently hired three VLCCs at $45,000 a piece per day. That comes out to $1.35 million a month or 68 cents a barrel on a 2 MMbbl VLCC. The article also reported that Gunvor booked an ultra large crude carrier at $64,000 a day or 48 cents a barrel on a 4 MMbbl ULCC.
A month ago you could not do this trade. However, since then forward curves in New York and London have steepened greatly. For example, the contango between the spot May Brent contract and the “red” May 2010 contract has jumped from $6.33 (-11.9%) to $11.11 (-17½%).
In today’s issue of The Schork Reportwe note that at the same time, shipping rates have plunged. Per quotes from Galbraiths on Bloomberg, VLCC rates from the Arab Gulf to the U.S. Gulf Coast have dropped by 50 percent. What’s more, since OPEC’s September meeting rates on this one route have dropped by 80 percent. This drop in the shipping markets coincides with well advertised adherence by OPEC countries to their respective quotas.
That makes sense. OPEC shipped less oil and refiners, in the midst of turnarounds, bought less oil. As such, demand for tankers fell. Thus, in an ironic sense, OPEC, by virtue of production cuts, helped create the current offshore storage play.
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Stephen Schork is the Editor of, "The Schork Report"and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.