The drastic drop in crude oil prices has created a situation where the cost of crude near term is cheaper than the cost of crude in the long term. This is called contango in the financial markets. Sometimes contango is naturally occurring based on carry costs or storage cost. But sometimes, when the price differential becomes significant, speculators can profit by purchasing a commodity on the spot market, paying the carry or storage cost, and contract for delivery at some future date.
In the past, there have been occurrences when crude oil contango has created an opportunity to store oil offshore in tankers. This has been opportunistic to both the oil traders and ship owners. I recently penned an article identifying some of the seaborne shipping companies within the tanker segment here, and mentioned the potential storage trade here. And today, I read an article from Vox Media further claiming that this trade is in full swing.
If so, which of those tanker companies that I mentioned in my previous article are positioned to potentially benefit? In my prior article, these are the companies identified for due diligence in the tanker segment:
- DHT Holdings (NYSE:DHT)
- Frontline (NYSE:FRO)
- Nordic American Tankers (NYSE:NAT)
- Scorpio Tankers (NYSE:STNG)
- Teekay Tankers (NYSE:TNK)
- Ultrapertol (NASDAQ:ULTR)
- Navios Maritime Acquisition (NYSE:NNA)
- Navios Maritime Midstream Partners (NYSE:NAP)
Not Appropriate for a Storage Trade
The first step is to quickly knock out any of these companies that could not benefit from a storage trade either due to assets or current operations. Specifically, if the company does not have large tankers available on the spot market, they should not be considered for this trade. This excludes the following companies:
- Nordic American Tankers: The company fleet is comprised of only Suezmax tankers. This is a reluctant exclusion, but unless the contango continues and becomes steeper, it is questionable that speculators would look at anything other than the largest VLCC tankers.
- Scorpio Tankers: The company fleet is comprised of mostly Panamax and smaller tankers.
- Ultrapertol: The company has only 4 small product (clean) tankers.
- Navios Maritime Midstream Partners: The company fleet consists of 4 VLCC's, but all are currently chartered out at fixed rates.
Not Favored for a Storage Trade
Of the remaining companies, the next step is to try and determine which have a low probability of profiting from a storage trade, and to give a reason why. For the reasons stated, I am excluding these companies:
- Frontline: The company is currently restructuring and has announced a number of debt for equity swaps that have resulted in shareholder dilution. However, the company fleet does include 24 VLCC tankers. More aggressive, risk tolerant individuals may want to include this company.
- Teekay Tankers: The company fleet has only one VLCC. The majority of the fleet is Afra and Suezmax tankers.
Top Picks for a Storage Trade Due Diligence
That leaves us with the following companies and the associated reasons:
- DHT Holdings - The company fleet includes 7 VLCC's that are on spot market rates. Seven others are on time charter,
- Navios Maritime Acquisition - The company fleet includes 4 VLCC's on floating rate and an additional 3 on time charter. The company also expects to receive delivery of its newest VLCC, the Nave Synergy this quarter.
The last time contango led to seaborne storage was back in 2008. When that occurred, more than 100 million barrels of crude were stored on tankers. At current price levels, the International Energy Agency expects up to 300 million barrels of crude to be put into storage. This includes onshore and offshore, and could include between 30 and 60 million barrels of crude stored in tankers in the first half of 2015. Investors interested in taking advantage of the potential profit made available through the tankers market should consider further investigating the above companies.
Disclosure: The author is long TNK, NNA.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.