Alt-Coin Trader

Large Petroleum Products Market Participants Storing Distillates at Sea, Distorting the Demand Picture

Oil product tankers idling in quiet waters of the world’s oceans are unlikely to move on until well into 2010 when more refinery shutdowns could curb production and force vessels to unload.

Floating oil product volumes, comprising mostly distillates such as diesel and the heating fuel gas oil, have surged to unprecedented levels of about 100 million barrels, but refiners are still pumping out more than the world can consume.

“We see no quick solution for the floating storage issue. It might run into the third quarter of next year,” said analyst David Wech at JBC Energy, adding, “the high contango reflects the supply-demand imbalance which is most dramatic in distillates.

Banks, oil majors and trading companies with access to cheap credit are looking to reap the benefits of a market structure known as contango, where future prices are higher than the prompt, that tends to emerge in times of oversupply.

They are buying gas oil, storing it on idle tankers in sheltered parts of the English Channel, Singapore and the Mediterranean and selling it at a higher price later.

Buying for storage at sea, dubbed “floating storage demand” by physical traders, creates the illusion of consumption in the products market, and keeps profit margins for distillates positive. This in turn sends a false signal to refiners to keep churning it out.

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