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FLOATING STORAGE

Floating storage is one of the common by-products of conventional crude oil trading practices: as charterers await market fluctuations, vessels remain stationary en-route to their discharge port. This trading strategy is particularly effective in scenarios when future deliveries are trading at a premium to those in the spot market, a market feature generally known as contango.

For this reason, when oil prices plunge significantly, floating storage can become extensively widespread, as traders wait for a cyclical price surge.

This topical phenomenon raises a series of specific questions on the legal challenges that ship owners and charterers face when dealing with floating storage.

The Trading History of Floating Storage

The concept of oil-storage trade developed in early 1990 and reached global attention during the "super contango" phenomenon of 2008, when the West Texas Intermediate (WTI) spot pricing plummeted from US$145 to US$40 per barrel within 5 months. The collapse encouraged a global frenzy to purchase crude oil, and those with access to cheap credit hoarded oil on ULCCs, VLCCs, and Suezmaxes. As a result, during the peak of the "super contango", over 100 million barrels of oil became stored at sea and, by the end of 2009, one in twelve of the largest crude oil tankers were primarily utilised as floating storage units, rather than for transportation.

Today, the oil glut of 2015-2016 has prompted a second wave in global floating storage peaks, and brought new attention to this phenomenon.

As global oil production outpaced demand, by 2014 the world market became oversupplied with crude oil: whilst the demand for floating storage increased, tanker rates soared to new heights. By November 2016, floating storage had reached levels of just over 90 million barrels, a third of which were held in the West African Gulf, Iran and the North Sea. In response to the glut, OPEC and non-OPEC members signed a supply reduction agreement (which was further prolonged by nine months last November), with the intention of coordinating a production cut of 1.8 million barrels a day.

Recently, as the market rebalanced, the Brent Forward curve has transitioned from contango into backwardation, providing Charterers with an incentive to sell oil, rather than store it.

Currently, the Brent forward curve overall remains staunchly in backwardation and floating storage volumes have fallen significantly.

Contact

For more information please contact Jonathan Moss Partner D +44 20 7280 8875 or Matteo Lissana, Trainee Solictor.

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This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

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