U.S. oil curve steepens, revives storage play

Traders work in the crude oil options trading pit at the New York Mercantile Exchange February 12, 2009.

NEW YORK (Reuters) - The premium for long-dated U.S. crude oil futures has grown dramatically since mid-July, which should spur traders to hoard more crude on land and at sea to turn a profit.

The discount of front-month to second-month oil futures has nearly doubled since July 13, to $1.75 per barrel from 89 cents -- a level that more than covers the cost of storing crude in tanks or vessels to sell for higher prices in later months.

(To see how oil price spreads and storage levels relate, click: r.reuters.com/fyg39c )

Onshore storage in the United States currently costs 75 to 85 cents per barrel a month, while storage in offshore tankers -- often a more flexible option -- costs $1.02, traders and shipbrokers said.

"The expansion in the crude curve has been dramatic during the past three weeks, along virtually all portions of the term structure," said Jim Ritterbusch, president of oil consultancy Ritterbusch & Associates.

"(The current contango) is large enough to trigger a fresh round of buy and store programs that will be filling up offshore vessels that were offloaded last May when the curve strengthened dramatically."

A steep upsloping forward curve in the oil market, called a contango, combined with weak recessionary energy demand to inflate U.S. oil stockpiles to 19-year highs in early May after global offshore crude storage in tankers spiked to more than 100 million barrels in April.

The contango spread peaked near $8.00 a barrel in February, before receding to average 78 cents in June. The move prompted a sell-off that has brought crude inventories down 9.5 percent from May highs.

BARGAIN CHARTERS

In addition to the wider contango, bargain prices for chartering Very Large Crude Carriers (VLCCs), which can store around 2 million barrels of oil, may help revive the offshore storage trend.

Lower seaborne shipments of crude oil and a surplus of tankers globally due to flagging demand mean that VLCCs can now be booked at day-rates of $35,000, tanker brokers said, down from $90,000 a day at their peak in October.

"We are hearing of more crude going into offshore storage," said shipping analyst George Los at C.R. Weber shipbrokers in Connecticut, adding global offshore crude storage levels have fallen to around 56 million barrels from April peaks.

Hoarding oil is a boon to companies with vast amounts of existing storage capacity, or those with the capital and expertise to buy oil and store in tankers.

Koch Supply and Trading, Vitol, and Royal Dutch Shell (RDSa.L) were among the biggest offshore storage players when the storage play peaked earlier this year, according to market sources.

Other beneficiaries include major storage tank holders like Enbridge (ENB.TO) and BP (BP.L) at Cushing, Oklahoma, home to the largest U.S. commercial crude storage hub, and delivery point for U.S. crude futures.

While overall U.S. stockpiles have been falling, Cushing stocks rose last week to 30.8 million barrels -- the highest level since March, and far above an average 20 million barrels for mid-July over the previous five years.

When Cushing inventories rise, it can send some storage players offshore, according to analysts.

"The storage play is back," said Phil Flynn of PFGBest Research in Chicago.

"The market's going to follow the money, but the question is where to store oil when tanks are already full to the hilt? This will push more oil offshore."

(Additional reporting by Robert Gibbons; Editing by Matthew Robinson and Marguerita Choy)