By Sarah Kent and Georgi Kantchev
The supertanker TI Oceania was built to ferry vast quantities of
oil across oceans, but for the next year it is expected to remain
anchored off the coast of Singapore, storing millions of barrels of
oil for Vitol SA, a giant trading house.
According to shipbrokers and analysts, the 3-million-barrel
megaship--one of the largest in the world--is just one example of
efforts by traders to turn a profit in the slumping global oil
market. The strategy is simple: buy and store oil at cheap prices
now, selling futures contracts to lock in the higher oil prices
expected later.
"It is one of the easy ways to make money and that's one of the
interesting things about it from a trading perspective: It's a
counter cyclical source of profit for the Vitols and Glencores and
Trafiguras," said Craig Pirrong, a finance professor at the
University of Houston, referring to a handful of the biggest oil
traders in the world.
According to shipbrokers and analysts, major traders including
Vitol SA, Gunvor SA, Trafigura Beheer BV and Koch Supply &
Trading Co. Ltd have chartered supertankers capable of storing a
combined total of more than 30 million barrels of oil--many of them
in the past few weeks. Vitol, Gunvor and Trafigura declined to
comment. Koch didn't respond to requests for comment.
The opportunity to stockpile oil in such large quantities has
come from the dramatic shift in the market for the commodity in
recent months. Since June, prices have collapsed, tumbling by more
than 50% amid soaring production from the U.S. and unwavering
output from the Organization of the Petroleum Exporting Countries,
at a time when global economic growth--the main determinant of
demand--is slowing.
The oversupply has given rise to a so-called contango in the
market, when the current price of a commodity is lower than prices
for delivery in the future. That makes it attractive for buyers to
purchase oil now at the cheaper rates, store it and strike sales
agreements at a higher price in the future, locking in profits.
The price difference between the March and August contracts for
Brent crude oil, the international benchmark grade, is currently $6
a barrel. That is the steepest premium since an oil-price slump in
2008 and 2009.
For years, oil trading houses have contended with high prices
and low volatility, which have squeezed margins. Firms have
responded by investing in infrastructure like oil-storage tanks,
terminals and refineries to gain flexibility in trading, as well as
better information about what is happening in the market.
Combined with the companies' access to the physical oil market,
these investments have made the trading firms uniquely
well-positioned to exploit the shift in the market and store oil
for a profit.
Glencore PLC, a Swiss commodity-trading giant, and Trafigura
Beheer, one of the world's largest independent oil traders, have
both already highlighted to investors that the market's dramatic
change since June is expected to bolster their profits.
Onshore storage tanks are filling up fast. According to
Citigroup Inc., China's coastline storage facilities ran out of
space as the country filled up strategic oil reserves last year.
Stocks at the U.S. storage hub at Cushing, Okla., have risen more
than 20% since December, according to Genscape Inc., a data
provider based in Kentucky.
That means more unusual storage options, such as the ships, are
becoming increasingly popular.
"Because so much oil doesn't have a home right now, there is a
frenzy of traders and companies looking to hire supertankers," said
Halvor Ellefsen, chief executive officer of Galbraiths, a
London-based shipbroker .
The last time there was a similar situation, in spring 2009,
more than 70 million barrels of oil were stored in tankers,
according to shipbrokers.
The current tanker craze may not quite reach those levels, as
the disparity between current and futures prices isn't as steep at
the moment. Bank of America Merril Lynch predicts the volume of oil
stored on tankers could rise to 55 million barrels by the end of
the second quarter.
However, the potentially lucrative storage trade isn't open to
everyone, nor is it risk free. It requires detailed knowledge of
the way oil is moved around the world that few outside a tightknit
group of oil traders possess. Making a profit depends on numerous
factors, including rates for freight and storage and, ultimately,
finding a buyer for the crude.
"If people think the contango is some kind of magical way to
make money they are incorrect," said Benoit Lioud, senior research
analyst at Mercuria Energy Group, a Swiss-based trading house.
"Storing big quantities of crude oil is not an easy game. It's not
a game at all."
Costas Paris in London and Christian Berthelsen and Nicole
Friedman in New York contributed to this story.
Write to Sarah Kent at sarah.kent@wsj.com and Georgi Kantchev at
georgi.kantchev@wsj.com
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