OPINION | Contango : Opportunities in Global Energy Logistics

OPINION | Contango : Opportunities in Global Energy Logistics

By Mahin Siddiqui
Energy Analyst, The Gulf Intelligence

OPINION | Contango : Opportunities in Global Energy Logistics

Image Attribute: Red oil barrels image via ezioman / flickr. Creative Commons 2.0 license.

The energy era has bought both, challenges and opportunities for the global energy industry. For all stakeholders in the energy chain, this remains a critical and uncertain time, and adaptation has become vital.

As the US shale boom shows resilience, and OPEC keeps it’s spigots at full flow, oil prices have halved to reach the $50 glass ceiling. At the same time, oil supplies from the North Sea and West Africa have reached their peak from the last three years and Russian nonchalance over a low price environment continues. Added to this is the historic deal between Iran and the super powers concluded in June 2015 which is expected to add another two million barrels of crude to an overflowing energy market once sanctions are fully lifted.

On the demand side many worry about China. As the locus of world oil demand, a further oil spread is foreseen as Beijing slows down to 2% per year as reports the Wall Street Journal.

As a consequence, August crude stocks have risen to stand at about 2.7 million barrels and Goldman Sachs Group Inc. estimates that crude supply will outstrip demand by 2 million barrels a day, warning of increasing pressure over world’s storage capacity - Asia’s Singapore, Europe’s Rotterdam and Middle East’s Fujairah combined. Lastly, as winter fast approaches and refiners enter the end of their calendar days, there is no option but to find storage space for millions of barrels of oil flooding the global energy market.

For oil producers, these are tough times. But for traders, crude surplus means to exploit contango – the time when the price of a commodity in present is less than the price in future.

In a cyclical industry, a contango market was previously witnessed in 2008 during the global recession as the dramatic economic downturn corresponded with a drop in oil prices. Five years ago, by end 2008, crude oil inventories reached a record high as oil fell to less than $38 per barrel and the difference between long term and short term maintained the widest gap ever witnessed.

While the super-contango of 2008 is not seen in today’s market, it is still true that many other contango opportunities have emerged. Chief Executive Officer of Vitol – the largest independent trader – Ian Taylor certainly agrees with bright prospects to play the field in an interview in August, with mounting evidence of a future market growing globally in the past three months.

Traders with access to physical onshore storage are certainly keen to exploit the opportunity - according to Bloomberg News, the Caribbean Island of St. Lucia and Saldanha Bay are on the receiving end of oil bounty providing substantial profits to pro-active companies. Vitol has sent Nigerian crude to an onshore facility in Africa’s Saldanha Bay on Aug. 25 while rival Glencore, not to be outdone, has sent a medium sized Everglade tanker full of North Sea crude to St. Lucia on Sep. 9.

In the Middle East, around the same time last year, many worried about empty tanks and hollow storage vessels. Today the Emirate is undergoing aggressive expansion as traders with access to physical oil storage scramble to profit from the great 2015 oil glut. Vopak Horizon Fujairah – wholly owned by Emirates National Oil Company (ENOC) – has announced the seventh phase of their expansion plan which will see five new storage tanks installed for crude oil with completion to be scheduled by summer 2016. Sharjah based Gulf Petrochem has plans to spend $80 million divided between Fujairah and East Africa.

While expanding to exploit a contango opportunity in an era of low oil price and high trading profits is a commendable business move, it may be well for the trading industry to note the nature of the cyclical industry. A storage tanks fill up and profits pour in, this is an ideal time for storage operators and trading companies with physical infrastructure to diversify cost effectively and aim to maintain a more diverse portfolio. Business models launched in times of steep oil prices can be revamped in an era of prolonged low price to sustain the next price super cycle.

For some companies this could mean diversifying in to and modifying infrastructure to cater to more oil products. Market conditions in 2008 quickly turned into a backwardation market by 2011 – the opposite of contango where traders had empty stockpiles. However, diversifying needs to come at a rational basis. For Middle East’s Fujairah it could mean to continue building crude storages but other operators in the North would do well to cater to chemicals storage, and even expanding into the waste and recycling storage market.

A key investment opportunity for trading companies could be to supervise construction of flexible storage facilities. Facilities with necessary infrastructure for storing and blending fuels will be regarded as more efficient and hence attract greater profits. More daring storage operators can take this a step further and create infrastructure for green fuel to ensure relevance in the sustainable energy sector. A typical lesson learnt in this industry is to diversify one’s business or die.

Lastly, trading companies need to ensure expansion plans need to come at a cost effective and efficient location. For example the Eastern Coast of England remains an ideal location for inland distribution of fuels through strategically developed transport links while the River Rhine in Germany remains a strategic location at the heart of Europe with access to ports of Antwerp, Rotterdam and Amsterdam. Prime locations in west coast and Baltic Sea is another opportunity to play contango for a diverse range of fuel products such as jet, diesel and fuel oils. In the Middle East, Fujairah is the only UAE emirate located outside the prone to conflict Strait of Hormuz at the Arabian Sea. While neighbouring Oman is gearing up to introduce Duqm’s crude park, Fujairah’ location between Europe, Africa, and Asia means a distinct geographical advantage for trading companies with well-developed infrastructure – a fact many industry officials give testimony to.

While this is obviously a hallelujah time for the trading community, investments in the post easy oil era must be made certainly, but with caution. As the only certainty is uncertainty in the global energy industry – in contango times and otherwise -  it would do well for trading companies and storage operators to be prepared to invest in key locations with a diverse portfolio to allow growth and survival in a distinctively Darwinian oil and gas industry.

About The Author:

Mahin Khalid Siddiqui
Mahin Siddiqui is an energy analyst and communications professional based in Dubai. She started her career with UAE and Iraq based energy consultancy Manaar Energy Group where she worked on energy trends and holistic analysis of MENA energy issues. Currently she is an associate at Gulf Intelligence, a Dubai based strategic communications agency and think tank, where she handles the media and production engagement for the company and partners. 

Her interest is in upstream and downstream conventional energy analysis, holistic trends identification, geopolitical analysis, and risk analysis of the MENAP region. She has a Bachelors in Social Sciences majoring in International Relations from Karachi based Shaheed Zulfiqar Ali Bhutto University of Science and Technology and a Masters in International Studies from the University in Wollongong, Australia. Mahin is fluent in Urdu and has basic knowledge of Arabic and French. She tweets @siddiquimahin 

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