When it comes to commodities, the only thing in demand right now is somewhere to put them.
From oil tanks in Oklahoma to wagyu beef refrigerators in Kobe, facilities around the world are filling up with products that can’t get where they’re needed or are simply not wanted at all. The cost of storage is exploding, in sharp contrast to the price of the commodities themselves, which are collapsing amid the chaos of the coronavirus.
It’s a potential windfall for the companies that inhabit this prosaic but critical corner of the commodities universe, like oil tank firm Royal Vopak NV and even ship owners like Euronav BV. And as conventional storage rapidly fills up, anyone holding onto products is having to get creative in the hunt for space or in some cases resort to just giving them away.
“If you’re a storage operator, this is the opportunity of a lifetime to capitalize on your assets,” said Michael Tran, managing director of global energy strategy at RBC Capital Markets. “During times of pandemic and distress, when people generally have less optionality, that optionality comes at a premium. Storage offers that because storage offers time value.”
The world’s producers of raw materials are confronting a historic collapse in demand as increasingly drastic measures to stop the spread of COVID-19 bring economies to a standstill, paralyzing factories, halting travel and crippling supply chains.
But stopping production is a worst-case scenario. It’s enormously costly and disruptive to shut down an oil field or refinery, for example. What’s more, customers may be under contract to take delivery of the commodities anyway, regardless of whether they need them.
So the supply keeps coming and storage gets fuller and fuller.
Nowhere is this more apparent than oil, one of commodities hit hardest by the virus as demand craters and the biggest producers vow to pump more than ever before. At the current rate, the world’s inventories will be full by the end of June, according to IHS Markit.
Brent crude has tumbled to the lowest in 18 years, which has also created a market structure that gives traders an incentive to store. By buying oil cheaply now and selling at a higher future price, they can profit as long as the difference is greater than the cost of storage, a strategy known as a contango trade.
Storage fees have more than doubled in the last few months, but traders are still desperately chartering vessels at a historic pace to hoard the fuel on the open sea, a practice known as floating storage. That’s triggered a three-fold jump in shipping rates this month.
“This is a once-in-a-generation type of event,” said Lois Zabrocky, chief executive officer of International Seaways Inc., one of the world’s largest providers of tankers. The firm has seen an uptick in business as charterers are starting to book vessels with storage options for periods of more than a year, she said.
Read the full AJOT article HERE.
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