Freight forward curve moves into steep front-month backwardation on OPEC+ oil flood

April freight forward agreement paper contracts moved into a steep backwardation of Worldscale 50 versus Q3 contracts Thursday on a combination of uncovered front-month short positions, Intercontinental Exchange data showed, and an expectation of floating storage requirements for physical tonnage.

"Guys need to buy April, May, Q2, everything basically," a broker said. "All being driven on storage stories and other markets massively."

A total of 350 lots of 1,000 mt each traded for the 70,000 mt US Gulf Coast-UK Continent FFA contract Thursday, including 110 lots for April, 14 lots for Q2, 135 lots for Q3 and 90 lots for the Q4 contract. Q3 contracts gained $3.0570/mt, or an equivalent of w15 over the day, with last trades showing at $29.5510/mt, or w145, while Q4 was rangebound at a w150 equivalent and the Q2 and April contracts both traded at a w180 equivalent.

The FFA contract is listed on ICE, under code WDE, and settled on the average of S&P Global Platts assessments for the corresponding month and had not traded Friday, when physical spot markets were assessed at w130, up on the day.

"TD3C (270kt VLCC Middle East Gulf-China freight futures) rallied, TD20 (260kt West Africa-UKC freight futures) rallied, USGC VLCC market has rallied, so people expect Aframax freight to move up next and guys are willing to buy April at w180 since it wasn't too long ago that spot was at w170+," the broker said.

Global tanker freight markets have been taken for a bull run as a result of COVID-19 demand destruction and Saudi Arabia and its allies intending to raise their production by more than 3 million b/d in April.

The sharp decline of oil prices after the 23-member alliance of OPEC+ failed to reach an agreement to extend or deepen oil production cuts of 1.7 million b/d that end in March and Saudi Arabia instead taking the lead in flooding the oil markets resulted in a fixing spree of global VLCC tonnage, either for single-voyage charters or for floating storage opportunities.

S&P Global Platts Analytics sees 10%-15% of the global tanker fleet being able to accommodate 300 million b/d of additional crude in offshore floating storage, including 72 VLCCs, 65 Aframaxes, 55 Suezmaxes and eight Panamaxes.

"The pressure from the big ships is moving up and Afras so far have been pretty protected from the trickle down effect of big ships," a shipbroker said.

"Now that VLCCs and Suezmaxes are running up with storage deals, this may cascade down to the Afras," a second shipbroker said.

This "trickle-down" effect could be seen for the 70,000 mt USGC-UKC/Mediterranean run Friday as the market firmed w10 on the day to w130 during the Platts Market on Close assessment process and shipbrokers saw rates heading toward w135 thereafter, according to Platts data. The cost of carrying 270,000 mt of crude loading on the USGC to China was valued at $15.5 million lump sum, rangebound on the day but up 135%, or $8.9 million lump sum, since the OPEC+ opened the flood gates.