Oilmarket Blog

BLOG THEMA'S : Backwardation

Tank Terminal Market Model – Part 1

Gepubliceerd Jacob on 3 december 2018 15:03:16

INTRODUCTION

 

Last week was a short review of the profit drivers for physical traders, where we explained in short how traders make profit. There are a lot of different factors influencing the tank storage sector. Mostly the imbalances in the sector create opportunities for financial players. The market appears to be complex and demonstrating a lack of transparency. PJK International has developed a Tank Terminals Commercial Performance Model to quickly gain insight and a higher proficiency of the tank storage market. This is the first part related to the Tank Terminal Market Model, next week we will publish the second part for you to be able to connect the dots.

 

MARKET FUNDAMENTALS

 

First we describe the market fundamentals as shown in the image below. Relevant market fundamentals for the oil storage business are the shape of the forward curve, the competitive market structure and the logistical factors supply, demand, imbalances and trade flows. The shape of the forward curve is determined on oil futures markets. The oil price forward curve can be upward sloping (contango) or downward sloping (backwardation). In a backwardated market is less demand for tank storage than in case of a contango. Inventory levels are also lower in a backwardation compared to a contango. Both demand and tank availability are therefore affected and this influences the commercial setting.
 

 

Furthermore the competitive market structure consists of a supply-side and demand-side market structure. Tank capacity and market shares of various terminal operators are key factors that determine the supply-side competition. The number of players, their size and diversity are key factors on the demand-side of the market. Both demand- and supply-side competition influence commercial performance of the terminals. And also Tank terminals are part of the oil products supply chain and therefore logistical factors such as local product demand, regional refinery output, imbalances and trade flows are very relevant. Developments in these factors influence the demand and requirements for tank terminal capacity.
MARKET DYNAMICS

 

Besides the market fundamentals we have to take into consideration the market dynamics. Relevant market dynamics are inventory levels, arbitrage and trade flows, changes in product specifications and variation in vessel sizes. These market dynamics have a direct influence on operations and on terminal requirements. A terminal that can accommodate and can adapt better and faster to these dynamics compared to competitors will likely show superior commercial performance. From the previous section you could already see that market dynamics are linked to market fundamentals.

 

CONCLUSION

 

The market fundamentals and the market dynamics are important building blocks for PJK’s commercial performance model. Next week we will go more into detail regarding this model. If you have any questions regarding the above mentioned subject please do not hesitate to contact me.

 

Thank you very much for your attention.

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Profit drivers for physical traders

Gepubliceerd Jacob on 23 november 2018 15:53:29

 

Download TT week report

 

 

INTRODUCTION

This is the second blog article of our series of 5 blog articles made for you to be able to better understand the drivers and the complexity of the tank storage industry. In the first article we took a closer look at the functions of a tank terminal. Click here to be able to read the first blog article.

HOW DO TRADERS MAKE MONEY?

Traders can take a physical (&paper) position and ‘buy low / sell high’ to be able to make profit. There are several strategies to profit from trading physical commodities. We can distinguish three main strategies:

1. Arbitrage
2. Speculation
3. Optionality

 

ARBITRAGE

Arbitrage is a very simple idea, it is really taking advantage in the difference of price on essentially the same product, to make profit. For example if you would have the price of gasoline in two different geographical markets. These different markets can be the Netherlands (A) and the US (B). If in market A the price would 1 dollar and in market B the price would be 2 dollars, then you can profit from the difference in price. The three main types of arbitrage are:

 

1. Geographical arbitrage
2. Time arbitrage
3. Technical arbitrage (blending)

 

SPECULATION

The U.S. Commodities Future Trading Commission defines a speculator as a trader who does not hedge, but who trades with the objective of achieving profits through the successful anticipation of price movements. Traders take a position in anticipation of moves in prices/spreads. For example with the gasoil price as is shown in the chart below:

 

 

OPTIONALITY

As for speculation, also for optionality volatility is key. Profit can come from market opportunities, where traders can limit losses if market turns against position. Three examples are:

 

1. Optionality during geographic arbitrage trade
– For example divert ship if there is a better deal and reduce costs
2. Optionality during contango storage
– Contango means that the spot price of oil is lower than future contract for oil
3. Optionality in transport mode
– Can be applied when transport costs are market driven and volatile

 

CONCLUSION

More familiarity within this complex market can provide you with quick insights derived from the financial markets. By watching and following oil prices spreads and market volatility can provide you with a better picture of the market. Other trends like backwardation and contango are also important to understand and analyse, to be able to make intelligent decisions. More to come in the next blog article next week, meanwhile feel free to download last week’s tank terminal report. And try to test your comprehension of the subjects discussed.

For more information or any questions please do not hesitate to contact us.

 

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Oil derivatives market and tank storage markets

Gepubliceerd Jacob on 1 oktober 2018 14:04:30

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Tank terminals play a vital role in daily oil trading by enabling break and making bulk operations and balancing short term variations in supply and demand. Oil trading companies have an interest in renting tank storage capacity as the oil derivatives market is related to physical oil markets. For ARA oil products ICE gasoil futures are one of the most important trading tools to manage risk. In the image below you can see the ICE LS Go Futures graph.

 

The backwardation at the beginning of the gasoil curve decreased to to +$0.00 despite far higher spot prices, while the contango in the middle decreased substantially. Trading opportunities have therefore become harder to find.

 

 

As gasoil inventories in the region are higher pressure is put on local gasoil prices, while higher crude prices make refinery input more expensive. As a result, Brent crude crack spreads are weak and this could lead to lower output of local refiners. Currently the tank storage market is in backwardation, traders have no incentive to store gasoil and will minimize inventory levels. That is why the demand for storage capacity will decrease when the market is in backwardation.

 

Would you like to have a weekly update about the tank storage market ? Or get a better insight about the ARA region ? Contact me for more information and become familiar with our diverse services.

 

 

 

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What Drives Tank Storage Demand? Arbitrage!

Gepubliceerd Jacob on 16 oktober 2017 14:30:11

Geographical price differences will lead to increased trade! In this article we would like to highlight the subject arbitrage and what this theme has for impact on the tank storage market.

Introduction to Arbitrage Economics
In theory (Investopedia), arbitrage is the simultaneous purchase and sale of an asset to profit from a difference in the price. It is a trade that profits by exploiting the price differences of identical or similar positions on different markets or in different forms. Arbitrage exists as a result of market inefficiencies.

Learn what drives tank storage demand. Join the FREE Webinar: PJK Tank Terminal Commercial Performance Model upcoming October 30th 2017.

But how does this work in practice? As commodity trading firm Trafigura describes on their website, they apply three forms of physical arbitrage:

  • Geographical arbitrage identifies temporary price anomalies between different locations;
  • Time arbitrage seeks to benefit from the shape of the forward curve for physical delivery (see our article on market structure); and
  • Technical arbitrage seeks to benefit from the different pricing perceptions for particular commodity grades and specifications.

In this article and to make things clear we will focus solely on geographical arbitrage and in particular the Northwest European Singapore arb for heavy fuel oil.

In order to calculate heavy fuel oil’s price difference between Northwest Europe or ARA and Singapore, we compare the FOB ARA spot price with FOB Singapore swap price, second month due to the duration of the voyage. The difference between these values is the spread and should be large enough to cover the trade costs.

On most occasions heavy fuel oil is shipped to Singapore in a VLCC (Very Large Crude Carrier/310 kt DWT) and loads approximately 270 kt of product. We therefore sum the VLCC freight rate, finance costs, port costs, inspection costs and demurrage to come to total trade costs. Should the spread be more than the trade costs the arb between both regions is open. When the spread is less than the trade costs the arbs is closed.

Learn what drives tank storage demand. Join the FREE Webinar: PJK Tank Terminal Commercial Performance Model upcoming October 30th 2017.

Importance of arbitrage to tank storage companies
From historical analysis we have learned that in the period between 1 January 2016 till 31 May 2017, 68% of the VLCC’s left for Singapore when the arb was open. 32% of the VLCC’s still undertook the voyage to Singapore when the arb was closed. So monitoring if arbs are open (or closed) is a good indication, to understand if trade between two regions is likely to increase. A positive trading environment, ultimately will influence tank storage dynamics.

Please note that arbitrage cannot be seen as a single indicator for business opportunities for tank storage companies. Other indicators that should be taken into account are: price volatility, market structure, and more. These subjects have been highlighted in other articles.

Source: www.trafigura.com.

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What Drives Tank Storage Demand? Market Structure

Gepubliceerd Jacob on 9 oktober 2017 14:30:02

The market structure stimulates traders to buy now and sell late. In this article we would like to highlight the themes contango and backwardation and what market structure means for tank storage operators.

Introduction contango and backwardation
An oil price for immediate delivery is called spot price or cash price while an oil price for delivery at a specified date in the future is called a forward price. When we plot these various prices and order them from short to long term delivery, a forward curve is created.

When a futures price (second month) is below a futures spot price (first or front month), the market structure is in backwardation. In this case, the forward curve is downward sloping. When the futures spot price is below the futures price, the market structure is known as contango. In this case, the forward curve is upward sloping.

Learn what drives tank storage demand. Join the FREE Webinar: PJK Tank Terminal Commercial Performance Model upcoming October 30th 2017.

A contango usually occurs when supply is higher relative to demand (supply glut) while in a backwardation demand is higher relative to supply (shortage). As time evolves, an oil forward curve can switch from backwardation into contango as in the case of the NYMEX RBOB futures forward curve (see: figure 2). When a cyclical pattern is visible, this is called seasonality. With respect to NYMEX RBOB futures, US gasoline prices tend to rise towards summer driving season during the period June and September. In the period before peak demand, oil traders tend to buy and store products to have product available in times of high consumption.

Learn what drives tank storage demand. Join the FREE Webinar: PJK Tank Terminal Commercial Performance Model upcoming October 30th 2017.

Importance of market structure to tank storage companies
In a period of contango, oil traders are encouraged to buy oil products today and sell in the future when the spread between two months covers storage, shipping and finance costs. When this opportunity presents itself, product is being sold, shipped and stored, resulting in more business for tank storage companies. This play is known as a ‘contango storage play’ but is limited by the maximum tank storage capacity available.

In some rare occasions, when the time spread is large enough even tanker vessels are chartered by trading companies to store oil products. This is known as floating storage. In this rare environment demand for tank storage is high and pushes storage rates for spot availability. Backwardation discourages storing oil products as a trader can sell oil today at a better price than in the future.

Is market structure the only business opportunity indicator for tank storage companies?
There are other indicators that should be taken into account such as price volatility, arbitrage and more. These topics and PJK’s market model will be covered in upcoming weeks.

Learn what drives tank storage demand. Join the FREE Webinar: PJK Tank Terminal Commercial Performance Model upcoming October 30th 2017.

Source: Morgan, D., Oil 101, 2009

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ARA independent oil product stocks decline

Gepubliceerd Jacob on 1 oktober 2015 9:45:40

London, 1 October (Argus) — Independent oil product stocks in the Amsterdam-Rotterdam-Antwerp (ARA) region continued to fall in the past week. Total product stocks stood at 6.603mn t today, down by 186,000t from a week earlier and by 294,000t from two weeks ago when inventories were at record highs, data from Dutch consultancy PJK International show.

Gasoil and jet fuel stocks saw the largest declines, falling by 59,000t each to 3.554mn t and 778,000t, respectively. Inland demand for diesel increased from the previous week, resulting in a drawdown in stocks, while imports of jet fuel into northwest Europe from the Mideast Gulf and Asia declined.

Naphtha stocks fell by 32,000t to 262,000t despite weak demand from gasoline blenders and petrochemicals.

Fuel oil stocks declined by 31,000t to 1.079mn t as arbitrage from northwest Europe to Singapore remained open and very large crude carriers (VLCCs) were being loaded at Rotterdam to take product to Asia-Pacific. Freight rates between the two regions have increased considerably in the past few weeks, impacting the economics of shipping fuel oil to Singapore.

Gasoline stocks fell, but only by 5,000t to 930,000t. Export flows to the US and west Africa remained at a low level during the past week.

Read more on the economics, drivers and market trends of the ARA tank storage market in our Knowledge center.

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ARA oil product stocks fall

Gepubliceerd Jacob on 24 september 2015 16:02:37

London, 24 September (Argus) — Independent product stocks at the Amsterdam-Rotterdam-Antwerp (ARA) trading hub declined in the past week after hitting record highs. Total product stocks in the region stood at 6.789mn t today, down by 108,000t from a week earlier.

Jet fuel stocks continued to climb during the week, adding 26,000t to reach 837,000t, marking the highest level since August 2010. The European market remains oversupplied, pushing product into floating storage despite high freight rates.

Export flows of gasoline to the US remain low, but stocks of the product in the ARA region declined by 67,000t to 935,000t during the week because of a drawdown in summer grade gasoline ahead of the upcoming switch to winter grade.

And the switch to winter grade is expected to bolster demand for naphtha from gasoline blenders. Stocks of the product in the ARA region stood at 294,000t today, up by 39,000t from a week earlier despite an open arbitrage to the Asia-Pacific region.

Gasoil stocks, which reached a new record high last week, dropped by 65,000t to 3.613mn t during the period as inland demand for the product increased.

And fuel oil inventories fell by 41,000t to 1.11mn t. Europe is well supplied with fuel oil, but arbitrage to Singapore remains workable and VLCCs are being loaded to take product to the Asia-Pacific region.

Read more on the economics, drivers and market trends of the ARA tank storage market in our Knowledge center.

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Vrachttarieven blijven in zijwaartse range hangen

Gepubliceerd Jacob on 7 augustus 2014 16:29:51

De vraag op de (Rijn)transportmarkt richting Duitsland, Frankrijk en Zwitserland concentreert zich op deze week resp. volgende week augustus belading. Weinig koopinteresse in de regio blijft de markt parten spelen.

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Vrachttarieven voor Boven-Rijn zijn iets teruggevallen

Gepubliceerd Jacob on 20 juli 2014 16:32:14

De vraag op de (Rijn) transportmarkt richting Duitsland, Frankrijk en Zwitserland concentreerde zich op de laatste 10 dagen van juli belading. Er was nauwelijks koopinteresse in de regio.

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