The Interplay Between OPEC Decisions and Oil Hoarding

A lot of oil has been floating in idle tankers at sea recently, as traders sought to hoard oil and take advantage of contango (higher future prices than current).

The number of supertankers being used to store crude and oil products shrank by about a third since March [according to ICAP]... About 30 very large crude carriers (VLCCs) are in use now, compared with about 45 late in the first quarter, shipping analyst Simon Newman said on Wednesday... A supertanker can hold about two million barrels of crude, more than France consumes every day.

The amount of oil stored at sea climbed to the highest in at least two decades, Frontline Ltd (FRO), the biggest supertanker operator, said in January. Traders sought to profit from contango, where longer-dated contracts are more expensive than near-term supply. The spread is profitable so long as it exceeds storage and finance costs.

I always found the hoarding of oil at sea an interesting dynamic in the tanker shipping world. For perspective, 15 less ships at sea hoarding oil is 30m barrels of crude, which compares to about 85m barrels/day global consumption.

Such hoarding has taken place in the last six months at an unprecedented scale, and reportedly a lot of money has been made recently trading oil in such a fashion. While it appears recent OPEC production cuts have put some pressure on the trade going forward, at the same time it appears that the same cuts helped facilitate traders' unwinding of seaborne hoarding positions without hurting the market price too much.

Oil trading profits are hard to track. But analysts say the crude contango probably helped several firms book billions in collective profits since late 2008.

Koch, Shell (RDS.A) and Vitol -- which held the largest floating stocks -- declined comment on their storage positions or trading gains. BP has said crude storage plays helped it gain $500 million in trading profits during the first quarter alone... "OPEC's whole idea in bringing production down has been to draw oil out of storage and lower import levels," said Roger Diwan, a partner at PFC Energy in Washington.

The oil sold ashore has gone almost unnoticed, offset by output cuts by the Organization of the Petroleum Exporting Countries that allowed traders to unload tankers without causing a tsunami of U.S. oil imports that would crash prices.

One has to wonder how many senior people involved with OPEC decisions might make money trading oil on the side.

Comments

[Mad Hedge F...:]

It's there for a reason. No one is buying oil here at $72 because they plan to burn it, use it to drive more miles, make asphalt or plastics, or rub it all over their bodies. They are buying Texas tea because they hate the dollar and there is no other surrogate reserve currency. Some of the biggest buyers of crude now are the oil producers, desperate for any appreciating asset they can park their revenues in size. This is why you can now walk across the Caribbean and not get your feet wet, jumping from one storage tanker to the next. The world is choking on surplus crude. Does anyone see anything wrong with this picture? Even perma bull Boone Pickens has a target of only $75. I hope he remembers to sell this time (sorry for the cheap shot Boone). The problem is that when you have so many hedge funds, financial players, and non consumers bunching up in a trade, the turns can be particularly vicious. All it would take is a little more evidence of a double dip economy, or even just an innocently strong dollar. Watch those green shoots with a magnifying glass.

Jun 28 03:48 PM

[OneRichOne:]

I don't see the tanker stocks doing anything. FRO is way down and paid only a $0.25 dividend last time. I assume the tankers which are used to store crude also are leased.

Jun 28 06:03 PM

[A Barrel Full:]

One has to wonder how many senior people involved with OPEC decisions might make money trading oil on the side.

Would be a very nice position to be in ;)

Storing oil in VLCCs only makes sense in a contango. The stocks started to be liquidated when the contango disappeared.

Jun 29 01:32 AM

[The Greates...:]

For some interesting reading:

www.aero-news.net/inde...;

Jun 29 10:04 AM

[Ferdinand E...:]

Good article, only it's too short. I would copy it and put it in the learned literature if the editors of the learned literature still published my work, which unfortunately they don't. I wonder could it have anything to do with my calling them ignoramuses.

Anyway, author, keep up the good work. We (i.e. I) need observations like those in this article for my next lecture.

Jun 29 10:17 AM