* Floating storage more likely prospect for gasoil than
* Contango to give storage companies welcome relief
* Market structure provides breathing space to sellers
LONDON, July 16 Traders in the Brent oil market
have started to use a word that was almost forgotten in the last
four years - "contango" in industry jargon, which could also be
described as "music to the ears of sellers".
The market has not seen a prolonged contango time structure
- with front prices lower than future prices - since at least
Back then, oil traders racked up hundreds of millions of
dollars by storing fully loaded cargoes at sea. With each week
and month that the oil was in storage, it gained in price.
The opposite time structure - backwardation - then
prevailed, up until this week when it reversed back to contango.
This led some analysts to predict a repeat of the 2008-2009
bonanza. Bank of America Merrill Lynch said it even saw a
But traders and most analysts are cautious for now, saying
that Brent prices for future months will have to rise much
further relative to prices for immediate delivery to encourage
large storage operations.
The contango now is more limited, giving trading houses and
oil companies more scope to take their time in selling cargoes,
but it is not enough to make it economic for them to keep fleets
of tankers at sea.
"Players who have onshore stock options will use them, and
there will be a bit more unsold on the water because it gives
traders more time, but I don't think we have the structure to
have real floating storage," said Olivier Jakob, an analyst at
Petromatrix in Zug, Switzerland.
The recent shift to contango also could provide relief to
storage companies, which have been struggling with a
backwardated market and an increase in global storage capacity
The premium of September Brent contracts to August contracts
has spiked to $1.50 per barrel, but it will become irrelevant
after the Brent August contract expires on Wednesday.
The premium of September to October stood at just 20 cents
and then evaporated for later months.
Analysts and traders say premiums need to be at least $1 per
month to cover costs enough to trigger substantial volumes of
"I'm not convinced we're going to see floating storage as a
strategic play yet, rather short-term storage as prompt sellers
are forced to float crude and deliver into later requirements,"
a trader of West African crude cargoes said.
Crude traders in Europe have been struggling with lacklustre
demand and relatively robust supply. Even as refining margins in
Europe have spiked this month following a fall in Brent prices,
traders have struggled to place barrels with refiners due to
poor appetite for extra volumes.
The benchmark Qua Iboe Nigerian crude oil grade has fallen
to a two-year low around $1 above dated Brent from a premium of
more than $3.50 in May BFO-QUA, and Russian Urals prices also
have remained at unseasonably depressed levels.
For gasoil, which attracts stronger demand in the winter for
heating, the contango may yet become strong enough to encourage
ICE gasoil futures have been in contango since the end of
May, widening to $5.50 a tonne this week, leading buyers to
increase their storage in Europe's Amsterdam-Rotterdam-Antwerp
(ARA) storage hub.
According to industry monitor Genscape, gasoil stocks at the
ARA and Flushing storage hubs rose for an eighth straight week
to 3.19 million tonnes on July 4.
The deepening contango is now opening further storage
opportunities for traders. With a contango of around $7 a tonne
over two or three months, storing gasoil on 100,000 tonne
long-range (LR2) vessels becomes economical, according to
(Reporting by Simon Falush and Ron Bousso, additional reporting
by David Sheppard, writing by Dmitry Zhdannikov; editing by Jane