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Oil Companies Storing Oil on Tankers, Waiting for Higher Prices

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I am not making this up, and this is NOT Iran, which has stored oil on tankers due to a lack of sufficient refining capacity for its heavy, nasty crude.

Even though the long-term outlook for oil is for higher prices, holding oil already produced off the market is no panacea. But the intent is not to buffer declines, since the amount contracted to be stored at sea is still only a fraction of daily world demand. This is a a speculative move by the oil companies themselves rather than an effort to shift the supply/demand equation (although the oil companies may hope that the information value of their move, that they are confident enough that prices are “too low” to spend money on storage, may help put a floor under oil prices). And due to the falloff in shipping rates generally, tankers can be contracted at very low prices, making this a cheaper gamble than it would ordinarily be.

We have noted before that above-ground oil storage is costly and not as tidy as one would imagine, so in cases like this, oil is not as easily stored as one might imagine.

From Reuters (hat tip reader Michael)

Oil companies plan to store millions of barrels of crude at sea as they wait for demand to pick up and prices to rise.

So far oil companies have booked ships capable of holding up to 10 million barrels, brokers have said, more than the daily output of top exporter Saudi Arabia.

On Thursday U.S. oil trader Koch and Royal Dutch Shell were the latest to confirm bookings of additional Very Large Crude Carriers (VLCC), brokers said…

Brokers said the cost of hiring vessels at current depressed rates would be less than the gains from waiting for an upturn in crude prices and in refiners’ profit margins.

More oil and trading firms were also considering floating storage, they said…

Some of the vessels were to load crude in the North Sea, the first time large volumes have been placed in floating storage there since the oil price crashed to below $10 a barrel in 1998.

‘All this oil has to go somewhere, especially if the refiners aren’t running at capacity,’ a Singapore-based crude oil trader said….

Although prompt delivery oil is very weak at around $50 a barrel on Thursday, its lowest level since January 2007. Contracts for March and April next year are above $53.

That has triggered some speculation big oil producers in the Organization of the Petroleum Exporting Countries could also store crude on ships for later sale.

But for Middle Eastern exporters, responsible for the bulk of any OPEC output cut, it is still cheaper to keep the oil in the ground.

‘The only reason as a producer you would pay money to put crude in floating storage would be if you would otherwise struggle to get it out of the ground,’ said one Gulf industry source.

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13 comments

  1. Anonymous

    with the Somali pirates in negotiations to buy Citigroup, there is definitely a downtick in risk for the area..

  2. ruetheday

    Sounds like an environmental disaster waiting to happen, whether by accident or intentional acts of terrorism/sabotage. I’d expect governments to tell these companies “no, you can’t store all this oil at sea along our coasts” rather soon.

  3. Anonymous

    This kind of stuff has been going on for ages.

    Most recently after Hurricane Ike the Mexican sold a huge amount of oil cheapky. The Majors bought it all up and put it on VLCC and have been parking them in the Gulf of Mexico at $100,000 a day.

  4. mdf

    ruetheday: Sounds like an environmental disaster waiting to happen,

    The risk is probably unchanged, and may even be reduced, since instead of normally being full of oil and moving it from A to B, they are full of oil and not moving at all.

    parking them in the Gulf of Mexico at $100,000 a day.

    Given a 2 million barrel tanker, if the price of oil isn’t increasing at least 5 cents a day, this will be a losing proposition. But today, aren’t the rental rates $10k (or less)? (cf. BDI articles mentioned here).

  5. Warm, Dry and Well Fed

    I would not read too much into this.

    If the report is correct then it suggests Asian demand is down, because that’s where most of the VLCC (huge 300,000+ ton) tankers go. Part of the problem is that it takes a while to slow down production in an oil field, so that oil has to be put someplace.

    Tanker rates for Suez Max (175,000 ton barely fit through Suez ships) have also cratered, especially west Africa-to-US and Europe rates.

  6. Anonymous

    “So will this put a floor on Baltic dry?”

    No, unrelated. Oil is not dry. Coal, grains, iron ore…. stuff like that is dry bulk shipped.

  7. CKMichaelson

    “Ten million barrels !

    But wait, that’s abut 11% of one day’s output….

    Let’s not get too carried away.
    - ckm

  8. matt h2o

    I don’t know about other areas, but in the North Sea you have to recall that a lot of the oilfields also produce gas. Being the winter, nobody’s keen to cut gas production – so if the gas is associated, you have to produce the oil as well.

    It’s also worth remembering that this time of year is usually a bit of a lowpoint for the oil and products mkts. Demand may pick up a bit around the holiday season, and considerably more come the spring.

    There’s been some floating storage used for LNG recently too, as it happens, though only for a matter of weeks.

  9. Anonymous

    FT Alphaville recently noted that oil is in super-contango: prices of oil in the future exceed current spot prices plus cost-of-carry and storage. This is a pretty rare occurrence. So perhaps this move makes perfect sense.

  10. Anonymous

    So will this put a floor on Baltic dry?

    Isn't there already a coal liquefaction technology to turn coal into oil? Just run the process in reverse and voilà: ACME brand dehydrated oil powder, just add water. Dig out the loose change in your pocket to rent a dry bulk ship for a day on the spot market, and Bob's your uncle.

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