Goldman's, JP Morgan, Morgan Stanley, others buying cheap oil & stashing in vessels on the high seas...

1/9/2009 4:08:00 PM

Traders Turn To Offshore Tankers As Oil Stockpiles Brim
LONDON (Dow Jones)--With storage tanks filling up onshore as global oil inventories soar, traders are turning their sights to oil tankers, floating at sea, as an alternative.

At least four new deals to charter large oil tankers as storage facilities in the U.S. Gulf of Mexico were struck Thursday, according to shipping and trading sources. The deals were fixed at a rate of about $70,000 a day.

The prices were markedly higher than average December traded levels of around $56,000-$58,000 a day, although buyers were said to be paying more because they wanted prompt delivery of the vessels.

As oil futures fall in line with sliding global demand, oil storage facilities in industrialized nations are bulging, widening the difference between the front-month and more expensive contracts for delivery further in the future. This opens up a profit-making opportunity for traders, who can buy crude oil on the physical market today while simultaneously selling it at a higher price in a forward contract. Holding oil in a tanker for a month would cost less than $2 a barrel, while it is possible to buy crude for about $40 a barrel for February delivery and sell it in June for $12 more.

But practitioners of this relatively straightforward trading strategy are running up against infrastructure constraints. Last week, the amount of oil in Cushing, Okla., the delivery point for New York Mercantile Exchange crude futures, hit a record 32.2 million barrels, and there is anecdotal evidence that other storage hubs are brimming as demand falls due to a faltering global economy.

So, traders are turning to very large crude carriers, known as VLCCs, tankers that can hold about 2 million barrels. While this practice is likely to support freight rates, it may keep oil prices depressed for longer as an uptick in such bookings heightens the perception that the world is awash in oil.

Nymex oil futures on Friday traded 4% lower at $40 a barrel, down more than 70% from the all-time highs hit in July 2008. February crude, the front-month contract, traded at a discount of more than $5 to the March contract. When oil for future months costs more than oil for near months, the market is said to be in "contango."

Forties At Sea

Earlier this week, private oil trading company Vitol Holding BV booked a VLCC for storage in the Gulf of Mexico for a lump sum of around $70,000 a day, a shipbroker reported.

"As long as the contango is long as there are distressed barrels they're going to buy them and put them into storage," one London-based shipbroker said Friday. "That will continue, there's still some inquiry out there."

Around 15 million barrels of North Sea Forties-grade crude oil is either currently or scheduled to be stored on board vessels, shipping brokers said. Equivalent to around 75% of the grade's typical monthly loading volume, it is enough to load more than seven VLCCs.

Brokers say that the most active participants in the market are the major international energy companies, who are reeling from the crash in oil prices, and trading houses such as Koch Enterprises Inc., Vitol and Phibro LLC, a unit of Citigroup Inc. (C).

Royal Dutch Shell PLC (RDSA) was heard to be using four VLCCs to store Forties, while BP PLC (BP) has booked supertanker Eagle Vienna for storage of Forties, according to market sources.

Vitol has chartered one VLCC for Forties, while Phibro has around 1 million barrels of Forties stored aboard vessels, a crude oil trader added.

Rough Seas For Boarding

Estimates of the total number of VLCCs currently chartered for storage purposes worldwide range from 15 to 25. Part of the difficulty lies in identifying what vessels are being used solely for storage purposes, one shipbroker said. Some vessels are chartered exclusively for storage, others with options to store and, in some cases, vessels are being used for storage although they weren't chartered explicitly for that purpose, he added.

Despite the apparent profits on offer, barriers to entry are high.

"There are some major players who up until very recently had been absent, who historically would have been the first ones in," another shipbroker said. "They're only just sticking their nose in. It does suggest credit has been an issue."

Other difficulties include obtaining the crude itself, with a lot of Middle East crude committed to term contracts, he added. Meanwhile, securing a tanker in the right part of the world and finding a place to harbor it can be difficult, said Arjun Murti, an analyst with Goldman Sachs Group Inc. (GS).

"It's not so much the ships themselves that are creating the bottleneck, but laws and other issues," Murti said in a conference call Thursday. "It becomes very expensive when you have to chug it around the world."

-By Nick Heath and Sherry Su; Dow Jones Newswires; (4420) 7842 9405;