(Repeats Feb. 10 column. John Kemp is a Reuters market analyst.
The views expressed are his own)
* Chart 1: tmsnrt.rs/2kbnk0O
* Chart 2: tmsnrt.rs/2kbiSiw
By John Kemp
LONDON, Feb 10 Brent futures prices indicate the
crude market is expected to move into a deficit with a
significant draw down in stocks from the middle of the year.
Brent futures are trading close to full contango or full
carry through until June but thereafter the calendar spreads are
no longer wide enough to cover the cost of storing and financing
Most stocks are held involuntarily because the oil is in
transit from the well to the refinery or because the stocks are
needed to meet the operational requirements of refiners.
But beyond these operational requirements, traders will hold
inventories only if prices are expected to rise or they can
cover their storage and financing costs by running a short
position in the futures market.
The structure of futures prices therefore determines the
profitability of storing oil beyond minimum operating needs, so
called “cash and carry” trades (tmsnrt.rs/2kbnk0O).
On Feb. 9, the structure of Brent futures prices provided
around 37 cents per barrel to hold stocks between April and May
and around 33 cents to hold stocks from May to June.
If the cost of onshore storage is around 20-30 cents per
barrel per month and the cost of borrowing is around 2 percent
per year, storage is just about profitable in May and June (tmsnrt.rs/2kbiSiw).
But the spread from June to July is just 24 cents and it
declines even further to just 15 cents from July to August and 6
cents from August to September. There is no way oil storage can
be profitable at such low spreads.
The economics of storage is very sensitive to assumptions
about the cost of leasing tank farm space and borrowing money.
The figures used above are purely illustrative. Some traders
will have access to storage much cheaper (or more expensive)
than these figures.
Both the cost of leasing space and the cost of borrowing is
specific to the tank farm and the storage company so will vary.
Onshore storage is generally much cheaper than offshore
storage, and some companies will have access to financing at
lower costs than others.
Companies with access to cheap borrowing and cheap storage
can make cash and carry trades work at a much smaller contango
in the futures market.
Nonetheless, the inter-month spreads in Brent futures are so
low it is hard to see how any traders will be able to recover
their storage costs from June onwards.
The current structure of prices points to storage tanks
starting to empty from the middle of the year as traders unwind
Of course, spreads can change. The Brent spreads reflect the
expected evolution of the supply-demand-stocks balance in the
If the crude market does not move into the expected deficit
and stocks remain high, the inter-month futures spreads will
have to widen again to pay for the necessary extra storage.
(Editing by Susan Thomas)