Traders profit as ship-stored oil doubles
By Javier Blas
Published: January 13 2009 18:03 | Last updated: January 13 2009 18:03
Oil companies and traders are storing enough oil in supertankers to supply the world for one day, in one of the most striking signs of supply outstripping demand as the impact of the economic crisis overshadows a string of Opec production cuts.
According to Deutsche Banks oil trading desk over 80m barrels of oil is now on floating storage, double the industry assessment of about 40m-50m last month.
Jens Martin Jensen, managing director of Bermuda-based Frontline, the worlds largest operator of supertankers, confirmed the figure of 80m barrels, saying that the oil was stored in supertankers capable of carrying about 2m barrels known as VLCCs and in smaller tankers of 1m barrels, known as Suezmax.
We are getting many enquiries about floating storage, Mr Jensen said. Players are looking for anywhere from one month to six months floating storage arrangements.
Companies such as Shell and BP, and big traders such as US-based Koch or Dutch-Swiss Vitol are storing oil in tankers, with shipping brokers reporting the hire of several supertankers as floating storage in the past few days.
Mr Jensen said investment banks were joining oil companies and traders and entering into floating storage deals. Shipbrokers said that Phibro, a commodities unit of Citigroup, had also started hiring tankers for storage in the North Sea.
Traders are profiting from a record price difference between spot oil and future contracts that allows them to arbitrage physical barrels buying spot oil and putting it into storage while, at the same time, selling a forward contract to lock in a profit.
The spread which is in a condition called a contango, where future prices are higher than spot prices is at a record high.
The difference between the price of West Texas Intermediate oil for immediate delivery and the one-year forward contract a key indicator on Tuesday widened to about $21.5 a barrel, the largest difference since US oil futures started trading 25 years ago.
The large spread is in part the result of the credit crunch, which has distorted the physical arbitrage process as some market participants particularly private equity groups and hedge funds cannot secure loans to finance oil storage, traders said.
The International Energy Agency, the western countries oil watchdog, said last month that the increase in floating storage had developed as a result of abundant prompt supplies having a hard time finding customers.
EDITORS CHOICE
Oil industry lifted by falling costs – Jan-12
Wellstream and Weir stay buoyant – Jan-08
Malone retires from BP – Jan-06
In depth: Oil – Dec-11
Copyright The Financial Times Limited 2009
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