Storing crude is becoming an increasingly viable option as Europe deals with a prompt overhang of crude in both the Northwest and the Mediterranean, said traders this week.
"We've had such bad margins for a long time, that refiners need to have significant encouragement to go above [the minimum] rate and buy incremental crude," said one trader Wednesday. "They needed some contango, and they've got pretty significant contango now to justify storage."
The North Sea Dated Strip, formed of weekly CFDs (Contracts for Difference) as a premium to a forward Cash BFOE contract, is in steep prompt contango.
One broker Thursday pegged the July 7-11 week CFD at September Cash minus $1.20/barrel, and four weeks further out, the August 4-8 CFD at September Cash minus $0.55/b.
This would allow holders of crude to sell the further out CFD at a higher level, effectively locking in a better selling price in future; should Dated Brent fall, losses on their physical sale would be compensated for by profits on the swap entered into.
Russian sour grade Urals, which trades more promptly than North Sea grades, has been going into storage for weeks, said traders. Urals differentials to Dated Brent were also in a steep contango throughout most of June, even at a time when Dated Brent was in backwardation, improving the economics of storage.
But now the steepening contango in other grade differentials is encouraging storage of North Sea grades, traders said. On Tuesday, Forties traded at Dated Brent minus $0.85/b for July 17-19 loading, while trading at Dated Brent minus $0.35/b for further out July 23-25 loading, with Shell selling a cargo to Phillips 66 and BP respectively.
As well as storage, market structure is encouraging holders of oil to absorb demurrage costs and load crude later.
"Apparently there is quite a bit of demurrage pricing in WAF," said one trader, referring to West African cargoes. "Quite a bit of July volume is being placed with demurrage against August requirements to clear."
There is a hefty overhang of July WAF barrels, according to traders, amounting to approximately 10 million barrels, an unusually high remainder at this point of the monthly trading cycle.
For August loading, more than half of the Angolan program remains unsold, while more than two thirds of the Nigerian program is still to be cleared. Some participants warned the market was only showing enough contango for short-term storage to be viable, rather than speculative storage in the hopes of a broader recovery.
"The Dated structure makes it easier to sell against later requirements, but it would take a lot of bravery from the markets to put something in storage in expectation of a correction on differentials," said one sweet crude trader Wednesday.
"The global sweet market is so long, [but] only the prompt pays for demurrage. Three months of storage wouldn't make any sense."
