Banks Are Financing the Dumbest Oil Trade Ever Made

Remember those stories about people storing crude on tankers in order to wait out the price slump? Well, those people are still doing that shit, in spite of the fact that storage costs have risen to the point that storing the crude, essentially, locks in a nice fat loss for hoarders.

Unlike previous oil storage trades, however, this one is unusual in that current oil prices and storage costs ought to make it unprofitable. Morgan Stanley estimates that the one-month Brent storage arbitrage currently produces a loss of $0.48 per barrel, while its six-month equivalent loses $6.11 per barrel.

That suggests “no incentive to store oil on ships,” the analysts write. “Yet, banks are seeing a sharp uptick in interest to finance storage charters. This storage is not happening for profit. Rather, the market is looking for places to store oil. To profit, traders need to hope for oil prices to rise enough to pay for the new debt incurred for this storage.”

The prospect of debt-fueled oil storage trades may raise concern should crude prices fail to rise enough to offset costs. Moreover, the ‘Singapore supply glut’ means the recent price rally may prove fragile.

“The increase in floating oil comes despite disruptions in the Atlantic Basin and an out-of-the-money floating storage arb[itrage], suggesting markets are not as healthy as sentiment suggests,” the Morgan Stanley analysts write. “It also highlights the speculative nature of much of the oil bounce this year.”

This is gambling, 100%, and the banks are financing it. Right now the 6mo loss is around $6; but that could widen, considerably, should crude follow seasonal patterns and start to drop again.

If prices rise, perhaps the Pirates in the Straights of Malacca can see a profit. However, should the price of crude start to flag and the waiver, we may all be entreated to a most furious crude sell off, ignited by tankers racing to book heinous losses.