Along with falling demand, storage crunch also added to the big oil crash.
So, what is cheaper--a cup of coffee at Starbucks or a barrel of oil? On April 20 that cup of coffee was more expensive, as US oil prices crashed below zero for the first time as the demand collapsed. The West Texas Intermediate crude May futures plunged to -$37.63 a barrel, according to Dow Jones Market Data.
The coronavirus pandemic has brought the world to a halt. Movement of people is restricted and there is little travel, slashing the demand for “black gold".
The pandemic has wiped out a third of global demand for oil, says news agency Reuters. There is a lot of oil sloshing around but there is little space to store it. Simply put, the world seems to have run out of tankers, oil depots or the famous tank farms to store crude.
Steel tanks lying empty after shale producers stopped drilling in the US are in high demand, Reuters said.
Onshore oil depots are full to the brim, but energy companies have found space—at sea.
Building a strategic reserve is standard practice for every import-dependent country but even oil exporters have been forced to plan. Out of on-ground storage, oil producers are hiring "supertankers" as storage facilities.
These gigantic ships are technically called Very Large Crude Carriers (VLCC) or Ultra Large Crude Carriers (ULCC). They can carry up to 2 million barrels of crude in one go and can be more than 400 meters long.
According to records, Saudi Arabia's state-run shipping company Bahri has chartered more than 20 supertankers, and most aren't moving around transporting goods as usual. The company continues to negotiate leasing deals with more shipping companies, and the number is expected to continue rising.
Multiple ships chartered by Saudi Arabia and other companies haven't moved for weeks from the Gulf region or are actively trying to ship as much volume as possible.
Not just Bahri, but many other companies like Koch, Unipec, Day Harvest and Hyundai Oilbank have chartered these ships for higher volumes, letting them acquire more oil at cheaper rates.
Moneycontrol tracked a few of these vessels and can confirm they haven't moved from their last known location for weeks or almost a month, indicating that these vessels are nothing but storage flotillas.
They are anchored as storage facilities and floating with millions of barrels of oil. They'll be mobilized when the value of "black gold" rises. Ship charter rates have gone through the roof and they are the ones benefiting the most right now.
A VLCC lease can run anywhere between $150,000 and $ 250,000 a day, depending on the load capacity. Hence, storage costs are further pulling down the crude price
“The oil tankers are earning right now and functioning as usual. But, the total cargo demand in the coming quarters shall drop due to oversupply and that’s when this industry will finally feel the ripple waves of COVID-19,” a source said.
COVID-19 is the name of respiratory illness caused by the coronavirus.
Can’t turn it off
Oil drilling is an expensive and extremely technical endeavour. Oil pockets or wells are natural underground stores of crude and remain in use for a very long time. You can’t just turn it off like a tap.
"Sealing or blocking an existing drill pipeline is like going against mother nature. The pressure is enormous, and the process is expensive. Hence, companies prefer to keep using the well during standard economic growth or store the surplus oil during downturns. But the tap is literally never turned off," said a chief engineer who is travelling with an oil tanker and didn’t wish to be identified. He spoke to Moneycontrol over the phone.
The Deepwater Horizon accident, the biggest oil spill in the US history that completed 10 years on April 20, occurred due to an unsuccessful attempt at "sealing" an off-shore well with cement. The well went on to leak for three months almost 5 million barrels of oil in the Gulf of Mexico, causing immense environmental and economic damage.
Countries and companies can reduce supply, but not cut it off completely. And for oil-dependent economies like Saudi Arabia, Iran and Russia, every drop in the price means a blow to the exchequer.
Making the most of it
India, which meets 80 percent of its oil needs through imports, is trying to make the best out of this crisis. Cheaper oil will save the government precious foreign exchange, which can be used for various social and welfare schemes, especially at a time like this when lockdown threatens the livelihood of millions of people.
The petroleum ministry has confirmed it will fill up strategic petroleum reserves by early May. India's storage capacity is 5.33 million tonnes, enough to meet the country's needs for 9.5 days. The government isn't paying for these purchases and has asked refiners like IOCL, HPCL, and BPCL to foot the bill. They will be reimbursed later.
The pandemic is a dynamic situation, throwing up unprecedented challenges. Governments are scrambling to check its spread, save lives and jobs and cushion their economies but no one knows for certain when and how will it end.
With its oil flotillas, the maritime industry continues to operate like usual, for now, but this could also be the calm before the storm.(The author writes on technology, aviation, and mobility.)