Floating Storage of Oil Products Will Continue into 2010
Hundreds of oil tankers like this one are anchored around the world with their cargo holds full of heating oil and other oil products. Most of these ships are expected to stay where they are fro at least a few more months. (image: greatshippics via flickr.com)
The ocean will continue to be the world’s biggest oil storage facility, according to an article published Wednesday by the Globe and Mail. According to the article, oil tankers floating around the world are currently holding an estimated 100 million barrels of oil products, most of which are distillate fuels like diesel and heating oil. According to the Globe, maritime storage of massive amounts of petroleum products will likely continue for some time. Said one analyst:
We see no quick solution for the floating storage issue. It might run into the third quarter of next year. The high contango reflects the supply-demand imbalance which is most dramatic in distillates.
Contango means that a commodity like oil will sell for more in the future than it would at the current “spot” price. This trend usually occurs when there is oversupply of a particular product. There is currently a steep contango in the crude and heating oil markets due to the record high inventories of oil and distillate fuels at sea and land.
Right now, the difference between the futures price and the spot price is estimated to be at $10 per ton. Industry experts say that storing oil at sea will remain profitable until this price drops to $7 per ton.
As HeatingOil.com reported last month, there are currently 129 oil tankers at sea holding oil until it becomes more profitable to sell. This is in addition to the record amount of oil stockpiled in traditional storage.
Experts expect demand for oil to pick up sometime in 2010. However, the amount of oil currently stored at sea is so massive that it could meet all of next year’s expected demand growth, leaving onshore stockpiles untouched.
Refiners are reeling from the effects of a low-demand, high-supply market as relatively high crude prices and low demand for refined products have cut deeply into their profit margins, leading to refinery shutdowns and worker layoffs. On November 20, Valero, the largest refiner in the US, announced plans to shut down its Delaware refinery and lay off 550 workers.
We could be seeing more of that in the future, according to one expert: “It is tough to see an end to this situation. We need to see further shutdowns of refineries,” said Petromatrix analyst Olivier Jakob.
Though low demand and big floating stockpiles is bad news for refiners, heating oil consumers will continue to enjoy the price stability brought by the current situation, at least until refining rates drop to meet demand.
Arsene Holmes says: says:
Dear Josh.
Thank you very much for your prompt answer
Josh Garrett says: says:
Thanks for your question, Arsene, it is a totally valid one. You have the numbers right–current world crude oil production is around 85 million barrels per day (for all producers). At that rate, 100 million barrels of crude would only account for two days’ worth of production, which doesn’t sound like a lot. However, there are many other factors that must be considered:
1. The data for crude and oil products in sea storage is wildly unreliable. As I reported in a post earlier today, in late 2008 Goldman Sachs estimated that the actual quantity of oil products in sea storage was double the amount reported by industry sources
2. The total number of barrels of oil at sea includes crude oil, heating oil, gasoline, diesel, bunker fuel, kerosene, jet fuel, and other liquid petroleum products, so it’s not just crude supplies that are affected
3. “Only two days’ worth of production” is still a gargantuan amount of oil. Human civilization depends on crude oil, directly or indirectly, for almost everything. Currently, demand is low and supply is high, so small shocks to the global supply chain would not be catastrophic. But even now, if all of the crude production in the world were to stop for 48 hours, the result would be something like total chaos. Even just the top 20 producers were to stop production for two days, everything would go haywire. My point is that we are living in an accelerating cycle of oil production and near-immediate consumption, so even if 100 million barrels of crude is on its face a relatively small amount, if it were to be suddenly removed from the market, every single citizen of the world would feel the effects. In the case of sea storage, those barrels aren’t just crude AND they are taken off the market gradually, but they could still have a major effect on oil markets and crude prices. We just don’t know what that effect is yet.
Hope this helps!
Arsene Holmes says: says:
I have been reading lately about this floating storage at sea. Reading the article, it says that they estimate that there are 100 millions barrels at sea.
Maybe my question is stupid as I am no expert at all on oil, but if I look at the production of the top 20 producers , it’s around 50 millions barrels day. So this storage business is only two days’ production.
Please feel free to let me know if this point is valid or shows a total ignorance of this market
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