In an interview with Tank Storage Magazine, Onur Capan, commercial analytics manager at VTTI, explains how the loosening of the contango market structure and trade and product movements have an effect on the storage market
How has the low oil price had an impact on the storage market in key global storage hubs?
The actual price of crude/products does not affect the value or storage rates. The role of storage assets in VTTI is to allow our customers to optimise the global supply chain, blending to meet various specifications, and to respond to supply and demand movements.
The low oil prices were a result of oversupply in the crude markets, with supply exceeding demand for the most part of the last three years. That means a lot of oil went into storage, building up both strategic reserves in some countries, but also commercial stocks. With so much excess oil for immediate delivery, the futures market was in strong ‘contango’, which made profitable for our customers to store oil in tanks for future delivery. This is adds extra demand for storage, but particularly felt in those assets where their main focus is for contango. VTTI’s assets, located in the global hubs or supply gateways, are used primarily for other purposes and so are not as sensitive to contango or backwardation.
On the other hand, refineries increased runs, partly due to cheap oil, but also in response to strong growth in petrol demand. While the bulk of the petrol output was absorbed by the markets, diesel and gasoil production was way above actual demand and that’s why we saw distillate inventories reaching record high levels, in particular in ARA. It is also reported that large quantities of petrol are in stock on both sides of the Atlantic, with stock levels above historic averages in the US and Europe
Overall, with such high crude and product stocks globally, the current market is still rather attractive for storage operators in many locations, and high refining activity stimulates trade and transhipment in major hubs.
What market influences are having the biggest impact on storage?
Stock levels and contango are only one part of the story; what drives terminal throughput is trade and product movements between different regions, which is a direct result of changing supply and demand balances.
For instance, Asia is the main driver of demand growth and a large proportion of new refinery additions are also there, so the market is really buoyant. Also, with independent refineries ramping up crude intake, China emerged as a major exporter of petrol and diesel and part of these exports were received in Singapore to be blended for regional markets.
I would say import terminals in emerging markets in general are doing very well: Mexico imported record high quantities of petrol last year. Africa is still largely deficit and demand is growing; both our assets in Nigeria and Kenya saw strong growth over the past few years.
New refineries are starting up in the Middle East, which is now becoming a large exporter of diesel to Europe; we see increasing volumes arriving at our ARA terminals. Tax changes and refinery upgrades in Russia are having a significant impact on product flows out of the country, with increasing exports of distillates but declining fuel oil.
Finally the US petrol demand reaching all-time highs in the summer of 2016 increased the number of cargoes arriving into East Coast terminals; our Florida terminal had a fantastic year.
How will the production cut by OPEC members have an impact on tank storage in 2017?
If OPEC members deliver the cuts that they promised –and there are initial signs that they intend to do so- this will finally put an end the global oversupply of crude by bringing supply more in line with demand. In fact, oil supply in 2017 is expected to be lower than demand and we will most likely see stock draws, but the current inventories are so high that a return to pre-2015 levels will probably take quite some time.
This is obviously not good news for simple assets in remote geographies that rely largely on storage activities, but for hub/supply gateway assets and more complex facilities specialised on transhipment, export, import and distribution, 2017 is a promising year as product demand continues to grow. Forecasts indicate that petrol and gasoil demand will be strong this year, which is very positive for trade.
Do you expect demand for storage to change and will there be need for more specialist storage?
The IMO’s decision to implement a global cap of 0.5% sulphur cap on all marine fuels will have a significant impact, not only on the shipping industry but also on refining and storage sectors. There are still a lot of question marks around how the market will adjust, and details on implementation are yet to be announced.
Although exhaust gas cleaning systems or ‘scrubbers’ which allow vessels to continue burn high sulphur fuel oil appear to be an economical solution, only a limited number of vessels will be equipped by 2020. Considering that LNG will remain a niche fuel in the short to medium term, a large proportion of the bunker fuel market will most likely consist of distillates blended with heavier streams such as low sulphur fuel oil or VGO. Therefore, in the first few years following implementation, we expect a significant increase in blending requirements, especially in major bunkering hubs such as Rotterdam, Singapore and Fujairah.
Capan will be speaking on the second day of the StocExpo Europe conference on March 29 about VTTI’s perspective on current market dynamics. For more information, visit www.stocexpo.com.