Why the global oil glut might not fill swimming pools after all

One of the warning lights that there’s too much oil around is no longer flashing, adding to signs that global crude markets are finally on the mend.
Just a month ago, oil traders were weighing up whether to park unwanted crude aboard tankers while BP Plc Chief Executive Officer Bob Dudley joked that swimming pools might be needed to hold the excess. Yet instead of offering bumper profits, as in previous market gluts, stockpiling barrels on ships would result in a financial loss, just as it has done for the past six months, in a sign the current surplus may not be as big as feared.
Declining U.S. oil production coupled with disruptions in OPEC members Iraq and Nigeria have helped revive crude to $40 a barrel, leading the International Energy Agency to conclude that the worst of the rout is over. Contrary to expectations that tankers would be needed, onshore storage hasn’t been exhausted, according to Torbjoern Kjus, an analyst at DNA ASA in Oslo.
“There’s less going into floating storage rather than more in the past few months,” Kjus said. “Fundamentals are gradually improving. The worst of the price rout was just sentiment.”
A crude trader would lose about $7.6 million if they wanted to park 2 million barrels at sea for six months, more than double the loss they would have swallowed in February, according to data compiled by Bloomberg from E.A. Gibson Shipbrokers Ltd. and oil futures exchanges.
The losses from storage partly reflect that hiring a tanker has become more expensive amid robust demand for crude. Day rates on the industry’s benchmark route — to Japan from Saudi Arabia — advanced to $60,003, according to data from the Baltic Exchange in London. That’s about 21 percent more than a month earlier. In dollars-per-barrel terms, the cost of using the ships to store for six months advanced to $6.80 from $6.16 over the month, E.A. Gibson estimates.
Yet the economics also give an insight into the oil market itself. Storing crude at sea becomes profitable when the spread between the current price and longer-term ones, known as contango, is wide enough to cover the cost of hiring a tanker.
The gap between first and seven-month futures narrowed to $2.79 a barrel on Monday from $5.07 a barrel on Jan. 29. It’s simply “nowhere near” enough to cover the cost, Ted Petrone, vice chairman of tanker operator Navios Maritime Holdings Inc. said on March 3.
It’s a distinct shift from the market conditions prevalent a month ago, when Chris Bake, a senior executive at Vitol Group, said that with primary storage sites “pretty much full,” it was “probably a good time to be a vessel owner.”
The biggest change between now and a month ago is oil supply that’s been unexpectedly curbed. One pipeline linking the the northern part of Iraq to the Mediterranean Sea halted in mid-February, while another from Nigeria was hit by sabotage. U.S. oil production is threatening to drop below 9 million barrels a day for the first time since November 2014.
From those three locations alone, combined output was restricted by about 1 million barrels a day compared with a month earlier, according to data compiled by Bloomberg. That’s about half the global surplus. Since then, flow from Iraq’s north has started to resume.
Trading houses including Vitol, Koch Supply & Trading LP and Glencore Plc, plus the in-house trading arms of BP and Royal Dutch Shell Plc, collectively made billions of dollars from 2008 to 2009 stockpiling crude at sea. At the peak of the floating storage spree, sheltered anchorages in the North Sea, the Persian Gulf, the Singapore Strait and off South Africa each hosted dozens of supertankers.
The receding risk that storage tanks will overflow encouraged Goldman Sachs Group Inc. in its view that the worst for oil prices is over.
“Your probability of having a containment issue, of blowing out storage, is starting to decline,” Jeff Currie, New York-based head of commodities research at Goldman Sachs Group Inc. said in a Bloomberg Television interview.