March 27, 2020
Last week we examined the possibilities and conditions regarding floating storage for crude oil. Increased supply from OPEC and the complete collapse of demand for crude oil and oil products due to the coronavirus has created potential opportunities not only for crude storage but also for clean petroleum products on LR2 tankers. For this week, we look at that sector.
With almost 3 billion people on stay at home orders worldwide, the first products to experience fall in demand and prices are gasolines and jet fuels -with some sources reporting that airlines are already looking for jet fuel storage options. Specifically, for gasoline, the typical tankers that are used for floating storage would be coated , or LR2s. The steep contango structure of the market and the relatively stable TC rates for the sector can potentially make this an attractive proposal for traders.
By using 3-month storage as a base case we saw how the contango structure has widened from the beginning of the month (when it did not make economical sense) to levels that are starting to produce profits. Right now, the 1/3 spread for gasoline has a cash breakeven rate of US $28,891.52 -slightly higher than the current average 1-yr TC rate of US $27,000 for LR2 tankers. The longer 1/12 spread for gasoline has a breakeven rate of $25,418.17. We can see that longer-term storage does not yield higher returns , despite the higher risks involved within volatile tanker markets and potentially degrading product after long-term storage in less than ideal environments. On these numbers, we took into consideration an average cost of US $0.10/ for fuel and insurance costs and assumed 800,000 average capacity for LR2s.
With the current 1-year TC rates for the LR2 sector hovering around US $27,000/day, we see that there is a slight pickup in activity in the Far East and Southeast Asia, and more importantly in the West Africa region (Figure 1).
Figure 1 – Daily LR2 Floating Storage – Jan 2019 – Mar 2020
Source: McQuilling Services