Oil Glut Trade on the Brink of Making Comeback in Blow for OPEC+

An oil trade that only works when the market is glutted may be about to make a comeback. That’s bad news for producers withholding near-record amounts of crude in a coordinated bid to help prop up prices.

The global Brent crude benchmark is currently trading quite deeply in a bearish pattern known contango, where the most immediate prices are far below those for contracts for supply in later months.

The discount has gotten so big that it appears to cover the nominal cost of hiring 1,200-feet long supertankers. In other words: traders can buy cargoes now, stash them on ships, and sell them later at a profit. Such a development would be viewed with concern by the likes of Saudi Arabia and Russia, the two nations who led the deepest global oil production cuts in history.

In recent months, they have been carefully trying to boost supply to bring it slowly back toward normal.

The contango implies that the market is so oversupplied that one of the industry’s most expensive forms of storage is becoming a viable way to hoard barrels — on paper at least.

While the oil market has recovered since the depths of the pandemic in April, there has been renewed weakness in recent weeks.

Read also: Condensate to the rescue as new OPEC deal pushes Nigeria oil production below revised 2020 budget

With the recovery in global consumption stalling at about 90% of prior year levels and OPEC+ slowly adding supply back to the market, there has been little incentive for refiners to ramp up their consumption of crude, potentially forcing it toward more unconventional storage methods.

To be sure, part of the reason that storage works on paper is because charter rates for tankers have crashed. Several tanker industry officials and shipbrokers said that, in practice, owners are still reluctant to accept multi-month charters at current levels because that locks in low revenue and it’s not ideal to keep the vessels in a single location for long periods of time.

They do acknowledge, though, that there have been increased inquiries about storing in recent days. Nevertheless, the numbers appear to work, according to storage-cost estimates from E.A. Gibson Shipbrokers Ltd. and exchange data compiled by Bloomberg earlier this week.

If floating storage does materialize, it could offer some relief to the tanker owners after rates plunged, according to analysts at Clarksons Securities Ltd. and Pareto Securities AS.

In recent weeks, some tankers that were booked during a super contango earlier this year for storage stopped doing so as those charters expired. The deepening contango may reverse that, or at least encourage some owners to extend existing contracts to store.

“We see some renewed interest in storage work as the contango has widened and spot rates remain low,” said Pareto analysts Eirik Haavaldsen and August Klemp.