Wednesday, July 18, 2012

Supertanker sea storage looms as oil prices fall

* Floating oil storage may become profitable as prices fall
* Contango oil price structure brings funds roll losses

* Pressure to sell prompt, buy forward helps build stocks

By Christopher Johnson and Jonathan Saul

LONDON, (Reuters) - Speculators could soon be hoarding crude oil in supertankers off the coast of Britain and other European countries if prompt oil prices keep falling, shipping and oil industry executives say.

A glut of crude oil in western spot markets is forcing the price of oil for immediate delivery below forward futures costs, and it could soon be profitable to buy oil, store it and sell it later in the year at higher prices.

Three years ago - the last time oil prices fell sharply on world spot markets - dozens of supertankers were moored along the English south coast and off Scotland as floating storage.

Nearby spot oil prices have almost fallen enough to make that happen again and the trend is likely to continue, opening up a trading window shortly, analysts and shipping firms say.

"We could soon see a return of floating storage," said Olivier Jakob, analyst at consultancy Petromatrix in Zug, Switzerland. "For floating storage to be workable, the spreads need to widen a little bit, but not much. We aren't far away."

Oil prices have fallen 30 percent from this year's peak over $128 per barrel, with nearby North Sea Brent crude oil futures on the InterContinental Exchange now about $90.

The resumption of Libyan crude oil production after almost a year of civil war, a big rise in Middle East oil output, global economic slowdown and the closure of several oil refineries have left the prompt oil market heavily over-supplied.

Brent for immediate use is trading at a discount of around $1 to August futures and oil for delivery in a year's time is around $2 dearer, in a price structure known as 'contango'.

The contango is not yet quite deep enough to pay for oil storage and other costs such as financing, but it has been widening steadily this month and storing oil at sea could soon be a viable option for oil companies and trading houses.


This week money managers controlling billions of dollars of pension funds and other investors will decide where to allocate their portfolios in the third quarter and they are likely to move out of prompt Brent if the contango looks set to persist.

A contango brings 'roll losses' for investors if they have to sell out of a weak front futures contract and buy more expensive later months as prompt months expire.

This would help depress prompt oil, deepening the contango.

"A contango feeds itself," said a senior trader with a large U.S.-owned oil company. "No one wants roll losses every month."

Average daily earnings for supertankers known as very large crude carriers, or VLCCs, on the benchmark Middle East Gulf to Japan route - the major market barometer - reached $11,159 on Friday, down slightly from Thursday, Baltic Exchange data show.

These are poor returns for ships that can carry up to 2 million barrels of crude oil, and they make long-term chartering of VLCCs an attractive alternative for some tanker owners.

The current cost of a one-year time charter for a VLCC runs from around $23,000 per day, and shorter charters, for three to six months, would start from around $25,000 per day - or about 37 cents per barrel of crude oil per month.

The August-September ICE Brent futures spread traded on Monday at up to 34 cents - just 3 cents lower.

Frode Morkedal, analyst with ship brokerage and investment bank RS Platou Markets in Oslo, said onshore stocks of crude oil were rising fast and offshore storage options could soon open.

"A supply overhang is building as the short term Brent curve has moved into a small contango," Morkedal said. "On-land inventories are not full, but should the overproduction of oil continue ... floating storage may again become a hot topic."

Oil traders say that for floating storage trading plays to be a serious option for most speculative traders, the spread between Brent futures months would have to exceed 40 cents per barrel and a margin of 50 cents would be better.

"Even if spreads are not wide enough yet to bring floating storage, they will encourage traders to hold cargoes longer," Jakob said. "That will put extra pressure on prompt prices."

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