Crude Supertanker Rates Collapse As VLCC ‘Traffic’ To China Lowest In 13 Months

A few days ago we warned, confirming Goldman Sachs’ earlier analysis that the world was running out of space to store crude distillate products
, that China was running out of storage space for crude oil as it dramatically ramped up its Strategic Petroleum Reserve ‘buy low’ plan. While the brightest indicator at the time was “about 4 million barrels of crude oil stranded in two tankers off an eastern port for nearly two months,” this week, the dial went to 11 on the oil-demand-fear-o-meter, as Bloomberg reportssupertankers sailing to Chinese ports plunged to its lowest in 13 months, sending the daily rate for shipping crashing. The marginal demand-er of last resort just left the market.

As a reminder, this is what Goldman said: “the build in Atlantic distillate inventories this year has been large, following near-record refinery utilization in both the US and Europe, only modest demand growth, especially relative to gasoline, and increased imports from the East on refinery expansion and rising Chinese exports.”

As a result, and despite a cold winter in both Europe and the US last year, European and US distillate storage utilization is reaching historically elevated levels, driving a sharp weakening in heating oil and gas oil time spreads.

Such high distillate storage utilization has two precedents, leading in both cases to storage capacity running out in the springs of 1998 and 2009, pushing runs and crude oil prices and timespreads sharply lower. This raises the question of whether today’s oil market oversupply can rebalance simply through financial stress – prices remaining near their current low level through 2016 – or if operational stress – breaching storage capacity constraints and forcing prices below cash costs like in 1998 and 2009 – is ineluctable.

And then something very unexpected happened: the world quietly hit a tipping point when, according to Reuters, China ran out of space to store oil.