Ships As Floating Storage for Crude Oil

We have all heard over and over and how many ships were essentially being used as temporary floating storage terminals for oil.  But now there is at least some quantifiable data on just how much black gold is being held on the waterways.  According to an article at Rigzone.com, some 80 million barrels of oil is floating around on the world’s oceans waiting for crude prices to rise. That is about one day’s worth of global demand.

The oil is on board very large crude carriers (VLCCs) that each holdabout 2 million barrels.  Everyone’s day cost is very different, but afigure of about $75,000/day to lease has been used lately. The mathworks out to around $1.12/month/barrel.  Of course day rates for "newfloating storage facilities" will fluctuate, so that is just a staticnumber based upon a snapshot.

Crude prices for June 2009 delivery have dropped to around $48/barrel,from more than $53/barrel last week. Crude is trading at around$43/barrel this morning.

As the spread narrows, it becomes less attractive to buy crude now andhold it for future delivery. The March contract for crude is alreadylower than the February contract.

Adding to downward pressure on future deliveries are the high rates ofcrude storage on land. The US Energy Information Agency released itsweekly report yesterday, and noted that commercial crude inventoriesincreased by 1.2 million barrels in the previous week to a total of326.6 million barrels. That doesn’t include the the 700 million barrelstucked away in the strategic petroleum reserve.

If forward delivery prices continue to drop, the current price willhave to drop, once more lowering pump prices. If there’s no place toput the crude, and there’s no increase in demand, where will pumpprices go? Below a $1/gallon?

Can OPEC do anything to halt this slide in crude prices? Not much,except cut its own throat by reducing production even further andfaster than it already is.

Paul Ausick
January 22, 2009