Thu Jan 7, 2010 10:12pm IST
By Christopher Johnson
LONDON, Jan 7 (Reuters) - A huge floating stockpile of crude oil in tankers in the North Sea and around northwest Europe has drained away over the last month as winter weather and political tensions have increased oil demand, trade sources say.
One major oil company that has been storing crude in supertankers off the British coast, Royal Dutch Shell (RDSa.L: Quote, Profile, Research), said this week it sold North Sea Forties grade by ship-to-ship transfer from the oil tanker Flandre, and other oil companies have been following suit.
As a result of these and other deals, only a handful of ships are now storing crude oil in British waters and the volume of crude oil stored at sea worldwide has declined to below 40 million barrels, from well above 100 million barrels in the middle of last year, shipping sources say.
"It looks as if the North Sea floating storage story is over for a while," said one dealer with a large international oil trader. "The structure of the market has changed as seasonal demand has kicked in."
Traders cite several reasons for the decline of crude oil in floating storage.
Demand for oil has increased sharply over the last month as freezing weather has swept across Europe and North America.
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Geopolitical tensions have also helped push oil higher after Russia briefly cut off oil supplies to refineries in neighbouring Belarus in a dispute over pricing, traders said.
These factors have pushed up the price of oil CLc1 for immediate delivery and narrowed the discount for prompt oil below forward futures prices LCO-1=R -- a "contango" that had allowed oil traders to buy oil now, put it in storage and sell it later at a higher price.
The spread between first and second-month Brent futures narrowed to around 55 cents a barrel on Thursday at 1600 GMT, from around $1 three weeks ago.
The cost of chartering ships has also risen sharply with rates for hiring "dirty tankers" designed to store crude oil doubling over the last three months.
So, as the charter periods for oil tankers used to store oil come to an end after up to nine months of hire, oil companies have chosen not to renew their contracts and have instead sold the oil into the spot market.
"With the spreads where they are, there's no chance of being able to roll these things," said a dealer at an oil trading house owned by a bank. "The approvals expire for these vessels after about six to nine months."
Source: http://in.reuters.com/article/oilRpt/idINLDE6061FF20100107
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