A Review of the Nigerian Energy Industry

Oil traders go for the ‘kill’

…Anticipates oil price recovery soon
Sam Ikeotuonye 14 February 2015, Sweetcrude, Lagos – Oil traders are expecting a turn-around soon in the declining fortune of crude in the international market.
Global oil prices have been in steep decline since June 2014, occasioned by slow demand growth and a number of other factors, among them the slowdown in economies globally, from China to the European Union; an overproduction of oil, with the United States producing more energy from shale oil deposits; and the Organisation of the Petroleum Exporting Countries, OPEC, holding its output steady, even as prices dropped.
brent.trader.shockedIndeed, the last quarter of 2014 and the early part of this year saw prices drop below $50 a barrel.
But, a Reuters report following this major slump predicted that prices would rebound this year and in 2016 as the market stabilises in the wake of the near-40 per cent collapse.
The Reuters survey of 31 analysts and economists, showed, for instance, that North Sea Brent crude would average $82.50 a barrel this year.
In obvious anticipation of this price recovery, which has also been predicted by many other analysts, oil traders are building up stocks to take huge advantage of the expected development.
As at January 21, according to shipping and oil market sources, oil traders have booked up to 20 tankers to store an estimated 40 million barrels of crude at sea, rising from 25 million barrels the previous, as they soaked up a stocks glut in anticipation of future profits.
The more than 50 percent fall in spot prices since June enables traders to make money by storing the crude for delivery months down the line, when prices are expected to recover.
The volume of oil earmarked for floating storage had risen in recent days, sources said. Some of the tankers could nonetheless still be used for conventional oil transportation.
“Floating storage remains a major focus in the tanker market as charterers have been fairly active in securing VLCCs (very large crude carriers) on time charters, with options to use the vessels as floating storage,” said Omar Nokta of Clarkson Capital Markets.
As far back as early January, trading firms, including Trafigura, Vitol, Gunvor, Koch and energy company Shell have started booking oil tankers for floating storage for up to 12 months, according to industry sources and freight bookings seen by Reuters.
This trading strategy was last used in 2009 when prices slumped and led to more than 100 million barrels of oil being parked on tankers at sea before stocks were sold off.
Industry sources say rates to hire vessels for longer periods — known as time charters — have risen by a few thousand dollars a day in the past week to over $40,000 a day, and are quoted at more than double the level at the same time last year.
“On average the latest one-year charters have been done around the $38,000/day to $40,000/day level though our Clarksons team now assesses one-year charters at a rather hefty $52,500/day. This adds roughly $0.20 per barrel to the monthly break-even requirement, which could impact interest for more floating storage,” Nokta said.
Taking into account vessel hire and other expenses including bunker fuel and insurance, overall monthly floating storage costs are estimated anywhere in the region of $1.5 million to $1.8 million per tanker.
Oil traders still stand to make a profit, however, as spot prices for crude are trading below future contracts, in a market structure known as contango. The December 2015 Brent contract was trading around $57.40 on Wednesday, $8 a barrel above the spot price.
“Floating storage is the cherry on the cake for the tanker market right now, which was already strengthening before this trend started,” said Georgi Slavov, a resource analyst at Marex Spectron in London.
“But the amount of oil now being stored at sea is adding some froth to tanker rates,” the source added.

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