Who stands to benefit from the oil crisis?
With the most recent developments in the capital markets, a lot of attention has been drawn onto the Crude oil futures. On the 20th of April, the price of the contracts for delivery in early May crashed to ($37.5) a barrel, meaning traders were paying that price per barrel to get rid of those early May deliveries. However not all futures proved to be equal since the Brent crude futures (oil primarily from the Atlantic basin) slipped by a modest 8% down to $25.80 a barrel. The stark difference between both benchmarks showed that oversupply concerns were a lot stronger in North America.
So what caused this?
Nearly a third of the world population is now in lockdown, resulting in a huge drop in global demand for gasoline, diesel, and jet fuel. That would have been enough to send oil prices crashing, but the price war started between Saudi Arabia and Russia literally flooded the market with oil — and to top all of that the US just hit a record production.
Clearly that didn’t stop retail investors to pile up onto these risky contracts thinking that “oil can’t go any lower”. Well, then why are they losing money?
“Contango is a situation where the futures price of a commodity is higher than the spot price. Contango usually occurs when an asset price is expected to rise over time. This results in an upward sloping forward curve.”
Simply in a market that expects the price of oil to go up in the future, no one wants to sell their oil now (at the spot price). That leads to even more oversupply and causing a further spread between futures price and spot price.
This feedback loop in the price action caused an unprecedented oversupply. As of mid-April the storage facility in Cushing, Oklahoma was 75% full and analysts predict that the facility will reach its capacity of 77 million barrels in the first 2 weeks of May, if no wells are shut.
The opportunity for Oil Tankers
As onshore storage space in North America is scarce, the demand for floating storage has increased substantially — resulting in a big price increase in the shipping industry.
There’s roughly a 30% percent increase in the oil stored on ships meaning that there’s still much room to grow.
The CEO of EuroNav said that the company has the potential to earn profit equal to its market cap this year if the rates persist through the rest of 2020. Such a rise in profitability is unheard of in the industry.
In the next few quarters, expectations are that companies operating VLCC’s (Very large crude carriers) and mid-size tankers are very well poised to take advantage of the situation and shoot up in value.
However offshore storage is only an interim solution, and will not help with the underlying issue. With the decrease in demand the only way to resolve the oil crisis will be to shut off wells. This will provide more long term support for oil prices.
