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.