DUBAI/LONDON (Reuters) - A deep drop in demand has forced many oil companies to use tankers floating at sea to store surplus refined products, with the volume off Europe equating to more than a quarter of the world’s daily fuel use.
Shipbrokers and oil traders said at least 24 million barrels of gas oil, used for diesel or heating oil, and jet fuel were being stored on more than 30 floating long-range tankers in Europe. Some traders say the stored volume might be even larger and would add to the pressure on bearish products markets.
The world consumes about 84 million barrels of oil a day.
“There are quite a lot of distillates stored in floating storage. Jet is unusual,” an oil products trader said. “Current contango covers the storing cost, but demand is so weak and we do not know when we can move jet.”
Contango, a market condition in which near-term fuel contracts are cheaper than those for later delivery, provides a financial incentive for companies to store oil, which, in turn, deepens the contango.
Some Middle East countries have taken advantage of the market structure and relatively cheap freight to store products.
Oil consumption in the region has been relatively steady.
In Europe, demand has dropped because of economic recession and the contango has added to a big build-up in stocks.
The International Energy Agency has said demand in western Europe was likely to fall by more than 6 percent this year from last year to 14.7 million barrels per day.
JET FUEL DIVES
The reduced consumption has had a particularly deep impact on jet fuel as air cargo and air travel has declined. Aircraft fuel accounts for about a fifth of the total amount the brokers and traders said was stored at sea.
Inventory levels of gas oil, used for heating, began the winter in Europe at higher than normal levels after oil companies built stockpiles to try to benefit from the market’s contango.
By the end of winter, inventory levels for middle distillates were almost unchanged, according to data released by government bodies and industry groups.
Publicly available figures do not include oil stored at sea.
The prompt inter-month spread for ICE gas oil futures, the European benchmark for middle distillate products, has been in contango for most of the time since November and was around $9/$10 a tonne on Thursday.
That compares with the same time a year ago when the inter-month spread was in backwardation of about $14/$16 a tonne.
Backwardation, which is considered more typical of oil markets because of the difficulty of storing these fuels, is the opposite of contango and means prompt contracts are more expensive than those for later delivery.
It remains to be seen when the storage will begin to disperse and the market move away from contango.
“When the contango comes off, some cargoes might be released from ships, weakening cracks,” an analyst said. “But it is currently not the case.”
Editing by Sue Thomas and Barbara Lewis
Our Standards: The Thomson Reuters Trust Principles.