Oil firms up floating storage as prices fall

A deep drop in demand has forced many oil companies to use tankers floating at sea to store surplus refined products, with the volume off Europe equating to more than a quarter of the world's daily fuel use. Shipbrokers and oil traders said at least 24 million barrels of gas oil, used for diesel or heating oil, and jet fuel were being stored on more than 30 floating long-range tankers in Europe. Some traders said the stored volume might be even larger and would add to the pressure on bearish products markets. The world consumes about 84 million barrels of oil a day. "It's a very powerful story, but the implications are simple. It is bearish," said Mike Wittner, Societe Generale's global head of oil research. He said it will put a cap on any serious uptick in gas oil cracks. "It is going to affect crude oil prices because at the end of the day it is refiners that buy crude oil and process it. If they see mediocre margins, they are not going to buy crude oil and process it," he said. Gas oil cracks, or premiums, to crude oil have fallen to around $7.70 (Dh28.6) a barrel from about $16 at the end of 2008, squeezing overall profit margins for European refiners. A market in which contracts for products for near-term delivery are cheaper than those for later delivery is referred to as being in contango and it provides a financial incentive for companies to buy cheap fuel and store it. That, in turn, deepens the contango. As onshore storage tanks have filled and freight rates have fallen, oil companies have resorted to storing fuel at sea. "So with clean freight coming down as seen in the weakening of the Baltic Index, then floating storage is an alternative solution," said Harry Tchilinguirian, senior oil market analyst with BNP Paribas Commodity Derivatives. In the Middle East, where oil consumption has been relatively steady, some companies have taken advantage of the market structure and relatively cheap freight to store products. In Europe, demand has dropped because of economic recession and the contango has added to a big build-up in stocks. The International Energy Agency has said demand in western Europe was likely to fall by more than six per cent this year from last year to 14.7 million barrels per day. The reduced consumption has had a particularly deep impact on jet fuel as air cargo and air travel have declined. Aircraft fuel accounts for about a fifth of the total amount that brokers and traders said was stored at sea. Traders said it was not usual for jet fuel to be stored in floating tanks. Inventory levels of gas oil, used for heating, began the winter in Europe at higher than normal levels after oil companies built stockpiles to try to benefit from the market's contango. By the end of winter, inventory levels for middle distillates were almost unchanged, according to data released by government bodies and industry groups. Publicly available figures do not include oil stored at sea. Keep up with the latest business news from the region with the Emirates Business 24|7 daily newsletter. To subscribe to the newsletter, please click here .