Floating oil lake likely to curb future oil prices

By Christopher Johnson and Joshua Schneyer - Analysis

LONDON/NEW YORK (Reuters) - Oil companies are storing a record volume of oil at sea in giant tankers as world crude supply outstrips demand, and this floating oil lake is now so big that it is likely to keep a lid on prices for some time.

Shipping analysts say around 100 million barrels of crude and about 25 million barrels of refined products, such as gas oil, are held in fleets of Very Large Crude Carriers (VLCCs) in Europe, West Africa, the U.S. Gulf and off Asian ports.

The volume of oil stored at sea has risen to record levels because the price of oil for use now is well below the value of oil for future delivery -- a market structure known as contango, typical of a bear market.

With tanker rental rates low and on-land oil stocks near record levels, it is cheap to store oil at sea, and using ships gives oil traders more flexibility than long-term storage tanks.

The last time floating oil stock levels were anywhere near these levels was in the early 1990s after the first Gulf war. Tanks were drained then into a rising market and traders and analysts say only a rise in demand will clear the stocks now.

But there is little chance of a quick recovery in oil use as the world faces its worst recession since World War Two, and the massive floating oil inventory is now haunting the market, an extra source of supply at a time when demand is extremely weak.

"Out of the market and off balance sheet, everyone knows about this oil but is trying not to think about it," said Simon Wardell, director of oil research at IHS Global Insight.

DEFERRED SUPPLY

"It is deferred supply, an almost ethereal source of oil waiting offshore. As long as it is unused, it is effectively acting as a support for the market, but at some point it will reappear so it is acting as a ceiling on oil prices."

Analysts calculate that the total of around 125 million barrels of oil stored at sea is equivalent to about 2.85 days of forward demand for the 30 industrial countries of the Organization for Economic Co-operation and Development (OECD).

The International Energy Agency (IEA) estimated in its last monthly report that on-land stocks were equivalent to 61.6 days of forward OECD demand. Adding the floating storage pushes OECD stocks up to 64.45 days -- exceptionally high by any measure.

"Historically, the general rule has been that 50 days of forward cover is mega bullish for oil prices, 53 days is bullish, 57 days bearish and 60 days mega bearish," said David Hufton, managing director of brokers PVM Oil Associates.

"What we are effectively saying is that oil stocks are much, much higher than has been acknowledged and the implications are that at some point any rally will come to a halt."

Analysts say the huge quantity of oil floating offshore may explain why the oil market has been relatively strong over the last few months at a time when the big industrialized countries have seen a sharp decline in oil consumption.

"INCREASINGLY BEARISH"