A shadowy build up of oil has intensified in the Atlantic Basin with homeless cargoes of crude turning into unintentional floating storage – another sign the global surplus has some way to go before clearing.
Off the coast of West Africa and in the waters of the North Sea, vessels holding millions of barrels of oil have become, in effect, accidental storage, as their owners fight for buyers.
These are competing with new loadings, as well as time-chartered cargoes that major trading houses such as Unipec and Trafigura booked to store crude months ago and are now selling.
“It’s pretty bad,” one West African crude oil trader said. “There is a lot floating there that wasn’t meant to be.”
The development highlights the diverging fates of crude grades as U.S. shale oil shuts light, sweet West African crudes out of North America, while state-of-the-art refinery additions worldwide are geared towards heavy crudes.
Just before OPEC (the Organization of the Petroleum Exporting Countries) meets to determine its next move, the Nigerian surplus in particular amplifies the yawning disconnect between futures and physical markets.
“The country is a good barometer for global oversupply, with its exports to Asia, Europe and the Americas fluctuating with regional demand,” analysts JBC said in a note on Friday.
Traders said there are around six million barrels of crude from Nigeria’s May programme available – some already loaded onto vessels. Cargoes such as the Front Ariake, which loaded in late April, are only now sailing out of the region.
That joins more than 65 million barrels left in June and July for Nigeria alone, leaving producers looking to extra-high run rates at European refineries for salvation.
In the North Sea, four expected June VLCC (very large crude carrier) bookings to Asia dwindled to one confirmed fixture, leaving Europe to absorb almost the entire Forties programme.
The stranded cargoes are limiting vessel availability, pushing May freight rates on the key West Africa to Asia route more than 10 percent, roughly 40 cents per barrel, higher than April, putting those buyers further out of reach.
Meanwhile, trader Unipec has reoffered Forties crude from Aframaxes the Thornbury and the British Falcon. Such ship-to-ship transfers are another symptom of the glut, as this is crude that failed to find a home weeks after it would normally have. Traders said that unless demand intensifies, these types of distressed sales would continue.
“This is the worst North Sea market for a long time,” one trader said.
This has weighed heavily on prices; Forties traded at the lowest differential to dated Brent since December 2008 this week, whilst Ekofisk traded at a nine-year low. Differentials for Nigerian grades were trading near five-year lows.
“The effect of unsold crudes is pressure on differentials, and potentially crude prices, as Asian buyers have to be enticed to acquire volumes,” said Arctic Securities analyst Erik Nikolai Stavseth.
Asian tenders that were the salvation of West African crude this spring have in the past week been awarded from floating storage, to Unipec and Trafigura, or pulled due to prices made expensive, partly by freight.
Unless refineries run at full blast over the summer, ship brokers said freight rates could stay elevated, which would keep pressure on differentials and sustain the glut.
“We see the overhang of Atlantic crude as supportive for both VLCCs and suezmaxes and as such remain positive near term despite the lack of a real contango curve which would renew interest in floating storage,” Stavseth said.