Tuesday, July 26, 2011

Oil goes offshore to make way for U.S. SPR barrels


By Sarah Kent

--Floating storage off the U.S. Gulf Coast rises as SPR stocks begin to hit the market.

--Six tankers currently chartered for offshore storage in the area, says ICAP.

--Interest in floating storage due to lack of capacity onshore, not contango play.

LONDON (MarketWatch) -- More crude oil is moving into offshore storage in tankers off the U.S. coast to make way for some 30 million barrels of crude being released into the market from the U.S.'s Strategic Petroleum Reserve as additional supplies start to strain onshore storage capacity.

The number of vessels storing crude offshore the U.S. has risen to six since the beginning of June, according to shipbroker ICAP's weekly overview of very large crude carrier storage published Friday.

Three very large crude carriers, or VLCCs, which can carry 2 million barrels of crude each, and three Suezmax tankers, which are able to carry around 1 million barrels of crude each, are currently chartered as storage vessels, ICAP showed in a table of VLCC storage.

However, the renewed interest in floating storage is more likely due to a lack of capacity in onshore storage rather than a financial play to profit from the cheaper oil prices now compared to the higher prices in the coming months, shipbrokers said.

"I'm pretty sure none of it is making money on a floating storage basis," one ship broker said Monday.

The use of floating storage became popular at the end of 2008 when the crude oil market flipped into a contango structure--when the front-month futures contract is cheaper than the subsequent months.

If the front-month contract is cheap enough in relation to later dates and freight rates are low enough, traders can lock in a tidy profit by storing crude offshore for a number of months.

However, since the second half of 2010 the number of vessels used for floating storage has dwindled to a handful and it is rare to hear of new vessels being chartered for storage purposes.

The U.S. has committed to release a total of 30.64 million barrels from its strategic petroleum reserve this month and next as part of the International Energy Agency's plan to ease the impact of the loss of Libyan crude.

Of that amount, 8.74 million barrels of crude are scheduled for delivery in July, with the rest due to hit the market in August and barrels are being moved offshore to make room for the influx.

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