Oil refiners are hunting for vessels to store jet-fuel and gasoline that nobody is buying, sending freight rates sharply higher, an indication that the global refining system is fast approaching a breaking point.
Until now refiners had mostly been storing unwanted product on site, but the latest indication from the tanker market suggests they are now being forced to place their output into ships. With local demand sharply down, if they can’t find storage, they’ll be forced to trim output, or even shut down completely.
“The shipping market is now the main bottleneck,” said Torbjorn Tornqvist, head of commodity trading giant Gunvor Group Ltd. “We are fast approaching the crunch point whereby it will be hard to find any ships, and shipping rates are currently? stratospheric,” he added in an interview.
If the refiners are forced to reduce their processing rates, it would mean even less demand for crude, creating a ricochet effect through the oil market.
The sign of a global hunt for tankers to store products is clear in the eye-watering prices traders are paying for the vessels. It now costs almost $7.5 million to haul an 80,000-ton cargo of naphtha, a material used to make gasoline and plastics, to Asia from Europe. Just a few years ago, the same route was paying little more than $1 million. Rates are soaring on all routes and ship sizes, according to the Baltic Exchange in London.
“The main driver for the rocketing clean tanker rates is that the production of clean product exceeds the current demand and that land-based storages are filling, which drives storage onto product tankers at sea,” said Joakim Norholm Vasehus, a spokesman at Torm A/S, a 131-year old Copenhagen-based owner that operates dozens of refined-fuel tankers.
Across the oil market, traders are looking for any ships they can get their hands on to store supplies at sea because on-land facilities are pretty much full — or fully booked. The glut — India’s shore tanks for fuels are now 95% filled — is also making it harder and harder to discharge cargoes into onshore facilities, delaying vessels for their next voyages, in turn driving up rates.
Torm estimates that about 7% of the global fleet of refined fuel tankers is now involved in some form of storage.
Oil trader Gunvor estimates that around the world refiners have cut processing rates by about 17 million barrels a day already, but that’s likely to increase to about 20 million barrels a day by early May. Then, oil producers would find it even harder to find a home for their barrels, a view that’s widely shared by other traders and oil companies.
“In a couple of weeks, the shipping market may force cuts in refining runs,” Tornqvist said. “And a few weeks later we may see a lack of crude oil shipping force cuts in productions rates beyond the agreed OPEC+ cuts.”
The impact of the lack of fuel demand is becoming more evident each day. Over the past week, Marathon Petroleum Corp., one of the biggest U.S. refiners, announced it would stop production at one refinery near San Francisco completely. Royal Dutch Shell Plc. idled several units in three U.S. refineries in Alabama and Louisiana.
The shortage of tankers to ship or store products is exacerbated by the fact that vessels that traders hoped to become available around now after hauling product remain anchored at ports, waiting to discharge. Oil traders say many import terminals are completely full, forcing tankers to wait on demurrage for weeks until they are able to offload, further tightening fleet availability.
Handysize tankers, among the smallest mainstream ocean-going tankers, are making in excess of $90,000 a day from hauling fuel across the Mediterranean Sea, the Baltic’s data show. That’s an extraordinarily high earnings rate for the ships, and compares with just $12,000 at the start of this year.
“The whole market’s gone absolutely nuts,” said Richard Matthews, head of research at E.A. Gibson Shipbrokers Ltd. “It’s absolutely unbelievable.”
Compounding the issue has been a recent trend for owners to ‘dirty up’ the ships — industry speak for switching over from transporting refined, or clean, fuels to crude or fuel oil instead. That eroded fleet capacity that’s now desperately needed to move or store products like gasoline, diesel and jet fuel.
Tankers are also sailing on longer routes than usual in order to capitalize on a so-called contango structure that now dominates oil and fuel markets, whereby later dated contracts are at a premium to prompt prices. Charterers are also asking for slower voyage speeds of 11-12 knots rather than 13, taking yet more capacity out of the tanker market, Matthews said.
Multiple long-range vessels, among the largest to typically haul fuels, have also been used for three- to six-month floating storage of diesel, jet fuel, and gasoline, diminishing vessel supply across the market, according to Randy Giveans, senior vice president for equity research at Jefferies LLC in Houston.
“There absolutely have been many older refined products tankers switching to carry crude,” he said. “This is rapidly tightening the products tanker market, pushing spot rates to record levels and time charter rates to decade highs.”
–With assistance from Elizabeth Low, Christian Wienberg and Barbara Powell.
© 2019 Bloomberg L.P