Commodities Storage & Transportation: Biggest Challenges Ahead - Essay Sample

Introduction

Ultimately, the biggest challenge in dealing with commodities is to find a place to store them in the current trade environment. The most challenged companies are oil distribution and transportation that face filled up products with no idea of how to get them to where they are required or otherwise not needed. On the other hand, the prices of products are declining sharply while the storage cost is increasing explosively as a result of halts impeding the transportation of such products. Some of the companies that depend on much storage services like Royal Vopak NV in Rotterdam, Netherlands are forced to craft ways of getting some storage space, and most times, they end up disposing of the products. Since the storage earns time value to products, the managing director at RBC Capital Markets, Michael Tran, advises that where there is no optionality during distress, the premium must be the optionality.

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The most outstanding storage and supply company I noted is the oil refinery company, which is forced to seek creative measures of storing oil products. Notably, the producers of raw materials in the world have experienced a historic decline in demand while the world economies are in a standstill. Most efforts are targeted at stopping the spread of the Covid-19 pandemic, which has crippled the supply chains and consequently halting travels. The worst case is ending production of the raw materials because no matter what the conditions are, consumers keep their demand for delivery of the products. For instance, stopping the production of oil refineries would suggest that factories are vulnerable to paralyzing and entirely halting economic progress. However, the supply of oil products is essential and ongoing across the world, but the storage facilities get full of production processes.

The oil industries are stricken by the current hibernating state of the economy despite the demand to produce more oil. According to IHS Markit, the entire world's inventories will be full, and no products will be able to get storage by the end of June 2020 (Bloomberg, 2020). Most oil refinery companies are forced to sell the oil at lower prices to companies that intend to store and get profits in the future. Through a contango trade strategy, the oil refinery companies offer incentives to traders who can provide storage services for the oil. On another note, the storage fees for the traders has increased more than double the standard cost within the last two months, prompting the traders to use "floating storage" to stash their fuel in open seas. Accordingly, the shipping rates have exploded more than three times the initial prices as a result of limited "floating storage" in this month only.

The increase in demand for oil storage boosts the storage rates for tankers, but the oil refinery companies are looking for long-term storage facilities to ensure continuity of production. For instance, the world's largest tanker providers, such as International Seaways Inc., have started booking the vessels with storage abilities of more than one year. The desperate crude oil companies are pinned down by the current storage costs, and apparently, the traders stow the crude oil until the prices increase. According to the information by The Citigroup Inc. this year, there are 1.7 billion barrels in the world of spare crude oil storage. Still, some more prominent companies expect over one billion more barrels to be set for the coming months. In the United States, the storage crisis is extreme, where the traders are forced to scramble for storage barrels in the Gulf Coast. It is, however, suspected that with the continued state of the Covid-19 hit, the storage crisis is heading towards a breaking point.

Reference

Bloomberg (2020). The Hottest Trade in Commodities is Finding Space to Store Them. SupplyChainBrain.Retrieved from https://www.supplychainbrain.com/articles/31080-the-hottest-trade-in-commodities-is-finding-space-to-store-them