OM in the News: Storing Fuel at Sea

The cost to ship gasoline, diesel and jet fuel around the world has soared to record highs, as traders look to dodge the commodity price crash by stashing refined oil at sea. The coronavirus lockdowns deterred activities like driving and flying that involve burning fuel. The resultant glut of oil sent prices into a tailspin. But with so much extra supply, the price to store or move oil products has moved in the opposite direction. The lack of on-land storage, surplus of supply and collapse of demand globally means the oil is on the water, writes The Wall Street Journal (May 3, 2020).

It now costs about $170,000 a day to charter a vessel from the Persian Gulf to Japan, 10 times the March 2020 rate of $17,000. Traders can make money storing cheap oil today and cashing in on it later. That creates more demand for tankers as traders are motivated to keep oil at sea, especially with almost nowhere to store it on land. Some vessels moving oil from Asia to Europe are skipping the Suez Canal and taking the long route around Africa for this reason.

Refiners, which distill thick crude oil into usable fuels, haven’t cut output fast enough to stop a surge in supply. So global stockpiles of petroleum products will grow by around 550 million barrels in the second quarter. A race is under way to store the surplus gasoline, diesel and jet fuel at sea. The number of available “clean tankers,” smaller ships that move refined petroleum products, has plummeted. “Dirty tankers” transport unrefined crude, and there are very few of these vessels left.

Logistical difficulties at ports pose further constraints. Tankers are taking longer to unload because there is so little free storage space on land. Coronavirus quarantine measures have added to delays. Bottlenecks are everywhere.

Classroom discussion questions:

1. What is the solution?
2.  How has the U.S. benefitted form the oil glut? Been hurt?