These are good times for people who own storage tanks. You can make real money renting them to people who want to fill them with oil or natural gas. Storing energy sounds like a dull business but in a world of energy abundance, the smart people are trying to figure out ways to profit from the gap between having it now and having it much later, when you do need it.
Back in January, Bob Dudley, the chief executive of BP PLC, suggested that people would soon be filling swimming pools with oil, there was so much spare crude about. In the U.S., it's gotten worse; according to the Energy Information Administration's weekly bulletin, the crude oil inventory is now 535 million barrels, a record and the numbers continue to soar. Throughout the OECD, there is enough crude oil inventory to cover 33 days forward demand and the stockpile rose by one billion barrels last year, the International Energy Agency says. Storage owners are making great profits and any crude trader with oil at sea is ordering the captain to steam very slowly because a barrel delivered next month fetches a higher price than a barrel sold today.
Finding oil or coal and digging it out of the ground is what the energy industry is supposed to be about but sometimes there is so much above ground that the business is really about supply and logistics – connecting producers and consumers profitably and at the right moment. It explains why oil traders such as Glencore, Gunvor and Trafigura can make billions of dollars even when the oil price is weak. Revenue may fall but the trading margin can be fatter if you have the right product in the right place at the right time.
The energy glut is now affecting the world's fastest growing energy commodity, liquefied natural gas, creating a curious new business in storing frozen methane in cryogenic storage tanks and reloading it on vessels for redelivery. Liquefied gas prices have collapsed in Asia, due to the sudden commissioning of a swathe of LNG projects in Australia and many of the vessels carrying frozen gas are finding their way into the Mediterranean and Northwest where the gas price is weak after a warm winter and inventories of LNG are climbing.
LNG is now a fully traded market with significant short-term and opportunistic trading with the reloading of gas on to vessels for transshipment forming part of a trading strategy. Argus, the energy price reporter, cites the example of a vessel chartered by a Spanish energy company, delivering a cargo to Pakistan, then steaming empty to the U.K. to load a cargo of imported LNG that will then be shipped on to a new buyer in Argentina.
The energy glut will be here for a while; the hopes of the oil bulls for a swift recovery in early 2016 have been dashed. They should have looked more closely at China, the source of the last decade's soaring demand for fuel. Domestic fuel sales by China's oil majors have plateaued and declined slightly last year. Sinopec and Petrochina, like their steel industry brethren, are still running their factories hard but unfortunately, they are dumping their oil products on the world market as demand is weak at home.
What this means is that for the short term, it is the traders of conventional energy products who will make money and anyone with a storage tank. The interesting question is to what extent this phenomenon may continue into the longer term and there is an interesting parallel in the renewable energy industry.
We know that the weak link in the solar and wind energy markets is availability. PV panels operate according to the solar cycle and wind blows intermittently. The technology that could transform solar from local disruptor to global transformer is efficient electricity storage that would take the cyclical pressure off power grids. There is a race under way to find the best storage batteries and a research agency ARPA-E, funded by the U.S. Department of Energy, recently claimed it had stolen a march on Elon Musk, the electric car tycoon, by developing a new generation of batteries that could outperform the lithium-ion technology promoted by his company Tesla.
ARPA-E's business is funding early-stage technology development and the problem with energy technology is the cost of full-scale commercial development. The sheer scale of energy infrastructure makes novel kit hugely expensive to bring to market but there is now little doubt that we are on the cusp of big changes in the energy market. The business of digging stuff out of the ground will be with us for a long time but not as a growth industry. Instead, it will be the business of storing and managing power distribution that attracts investment and creates jobs.
We should not be so surprised by this turn of events. Way back in the early years of the energy industry, a marketing company designed a new ship to store and transport kerosene from Central Asia to Europe and went on to build one of the world's greatest oil companies. It was called Shell Transport & Trading.
Carl Mortished is a Canadian financial journalist based in London.