Offshore Oil Storage Growing As Oil Prices Fall

Crude oil prices took a big hit on Monday declining to 44.59 giving up $1.11 while Brent oil fell $1.16 to 47.41, but the good news was that the spread has widened a drop moving to almost $3 but remains extremely tight. Gasoline prices continue to fall both wholesale and at the pump. Gasoline stocks soared in last week’s EIA inventory report. RBOB gasoline is trading at 1.3386 down by 407 points.  Oil traders showed a lack of interest in the commodities in the Asian session on Tuesday morning.

Oil prices fell more than 2 percent, pressured by tumbling equities on Wall Street and weak Chinese economic data, although an estimated drawdown in crude stocks at the key U.S. storage hub appeared to limit losses, traders said.

Gyrations in U.S. equity prices and the dollar from bets on the timing of the first U.S. rate hike in nearly a decade have fed volatility in oil prices, which have swung up to 8 percent a day over the past month.

Growing oil oversupply and eroding demand for energy in No. 2 economy China and other Asian and emerging markets have halved crude prices over the last year. While the global oil glut has begun to ease after record high US production started to fall, resilient output from other major producers has kept the oversupply at more than 1 million barrels a day in the 93 million barrels a day global market.

While traders are already cashing in on the surplus by housing oil in onshore tanks across the globe — including on the tiny Caribbean island of St. Lucia– expanding the storage to tankers at sea may near a point where it becomes profitable, according to Citigroup Inc., Goldman Sachs Group Inc. and IHS Maritime & Trade. A structure called contango, when the price of a commodity to be delivered in the future is higher than if it was sold today, has been moving in the right direction.

With the OPEC already pumping above its 30-million-barrel-a-day quota for more than a year, Iran’s plans to boost output after sanctions are lifted threaten to worsen the oversupply — a market condition that typically deepens a contango. That could see more oil stored at sea during the fourth quarter, according to Andrew Scorer, an analyst at IHS Maritime & Trade.

Vessels laden with oil, parked offshore from Singapore to the Gulf of Mexico, became a feature after the global financial crisis as the widening contango allowed traders with access to storage to lock in a profit. As the spread expanded again amid a global supply glut, tanker owner Frontline Ltd. fielded inquiries last month about options to house crude at sea.

In China, the world’s largest commodities consumer, industrial companies’ profits fell at their fastest rate in four years, sparking fresh worries about manufacturing activity reports due later this week.

Offsetting some of that bearish sentiment was data from market intelligence firm Genscape estimating a drawdown of over 1 million barrels last week from the Cushing, Oklahoma delivery hub for U.S. crude, traders who saw the figures said. Genscape’s Cushing stockpile estimates are a precursor to official inventory data on U.S. crude due each Wednesday from the U.S. Energy Information Administration. Genscape had estimated draws of around 2 million barrels in each of the past two weeks.

On Wednesday traders will be awaiting a key report on US oil production. The Energy Information Administration will publish its Petroleum Supply Monthly report which will be closely watched for signs how the drop in the number of rigs drilling for oil in the US is affecting production. On Friday, rig count data from Baker Hughes Inc. showed the number of rigs fell for a fourth straight week.

There will be “laser focus” on US oil-production data, and any signs that output has shrunk, even retrospectively for previous months under the EIA’s new methodology, could provide a boost to both WTI and Brent crude prices, Adam Longson, head of energy research at Morgan Stanley, said.