10 August 2016, London — The volume of crude held in floating storage off Britain’s coast has grown this year due to excess supply, trade sources say, helping to put a cap on some parts of the Brent market which helps set global prices.
More than 10 million barrels of crude – over 10 percent of daily world production – was parked in tankers off the British coast for part of July, according to trade sources and shipping data. While some floating storage is not uncommon, traders say the amount has been rising this year.
“This is not common in my experience,” said the North Sea oil trading source, adding that stored crude has kept a lid on the market. “There’re all these barrels floating around and they can come out at any time and need to find a home.”
At least three supertankers holding Forties crude remain off the British coast, according to Reuters shipping data.
As well as a crude surplus, other factors have helped encourage floating storage – the contango price structure for Brent, where later-dated supplies are more valuable than prompt barrels, and cheap freight and demurrage.
“You need the demurrage rate to line up with a deep enough contango to make it pay for itself,” said a second trade source. “While there’s a fairly decent contango there’s going to be some sitting around. Freight is very cheap.”
The North Sea market helps set global oil prices through the dated Brent benchmark. While arbitraging the crude out of the region can boost the market, the buildup of unsold Forties has weighed on prices.
“A cargo that loaded earlier and should have sailed off somewhere is still in the market,” an industry source said. “The floating storage is a combination of weak demand and maybe traders making a call on a weak market.”
The Brent benchmark is set by the cheapest of four North Sea grades – Forties, Oseberg and Ekofisk, as well as Brent itself. The forties is usually the cheapest and it has traded at a discount to dated Brent since June 3.
France’s Total for several days in July was offering Forties from a supertanker, Orthis, without selling – a relatively unusual development, according to other traders. Total declined to comment on why it was making the offers.
“Those barrels are sitting there because the market is weak,” the second North Sea trade source said. “But it has the potential to interact with the price assessment process, so to that extent, it potentially acts as a cap on things.”
*Alex Lawler; Editing – William Hardy – Reuters