• 20 hours PDVSA Booted From Caribbean Terminal Over Unpaid Bills
  • 22 hours Russia Warns Ukraine Against Recovering Oil Off The Coast Of Crimea
  • 1 day Syrian Rebels Relinquish Control Of Major Gas Field
  • 1 day Schlumberger Warns Of Moderating Investment In North America
  • 1 day Oil Prices Set For Weekly Loss As Profit Taking Trumps Mideast Tensions
  • 1 day Energy Regulators Look To Guard Grid From Cyberattacks
  • 1 day Mexico Says OPEC Has Not Approached It For Deal Extension
  • 1 day New Video Game Targets Oil Infrastructure
  • 1 day Shell Restarts Bonny Light Exports
  • 1 day Russia’s Rosneft To Take Majority In Kurdish Oil Pipeline
  • 2 days Iraq Struggles To Replace Damaged Kirkuk Equipment As Output Falls
  • 2 days British Utility Companies Brace For Major Reforms
  • 2 days Montenegro A ‘Sweet Spot’ Of Untapped Oil, Gas In The Adriatic
  • 2 days Rosneft CEO: Rising U.S. Shale A Downside Risk To Oil Prices
  • 2 days Brazil Could Invite More Bids For Unsold Pre-Salt Oil Blocks
  • 2 days OPEC/Non-OPEC Seek Consensus On Deal Before Nov Summit
  • 2 days London Stock Exchange Boss Defends Push To Win Aramco IPO
  • 2 days Rosneft Signs $400M Deal With Kurdistan
  • 2 days Kinder Morgan Warns About Trans Mountain Delays
  • 3 days India, China, U.S., Complain Of Venezuelan Crude Oil Quality Issues
  • 3 days Kurdish Kirkuk-Ceyhan Crude Oil Flows Plunge To 225,000 Bpd
  • 3 days Russia, Saudis Team Up To Boost Fracking Tech
  • 3 days Conflicting News Spurs Doubt On Aramco IPO
  • 3 days Exxon Starts Production At New Refinery In Texas
  • 3 days Iraq Asks BP To Redevelop Kirkuk Oil Fields
  • 4 days Oil Prices Rise After U.S. API Reports Strong Crude Inventory Draw
  • 4 days Oil Gains Spur Growth In Canada’s Oil Cities
  • 4 days China To Take 5% Of Rosneft’s Output In New Deal
  • 4 days UAE Oil Giant Seeks Partnership For Possible IPO
  • 4 days Planting Trees Could Cut Emissions As Much As Quitting Oil
  • 4 days VW Fails To Secure Critical Commodity For EVs
  • 4 days Enbridge Pipeline Expansion Finally Approved
  • 4 days Iraqi Forces Seize Control Of North Oil Co Fields In Kirkuk
  • 4 days OPEC Oil Deal Compliance Falls To 86%
  • 5 days U.S. Oil Production To Increase in November As Rig Count Falls
  • 5 days Gazprom Neft Unhappy With OPEC-Russia Production Cut Deal
  • 5 days Disputed Venezuelan Vote Could Lead To More Sanctions, Clashes
  • 5 days EU Urges U.S. Congress To Protect Iran Nuclear Deal
  • 5 days Oil Rig Explosion In Louisiana Leaves 7 Injured, 1 Still Missing
  • 5 days Aramco Says No Plans To Shelve IPO
Alt Text

Is The Aramco IPO On The Brink Of Collapse?

Conflicting news suggests that Saudi…

Alt Text

Saudi Arabia Looks To Shelve Aramco IPO

Saudi sources have confirmed that…

Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

More Info

Dropping Prices and Supply Glut Sends Oil Into Floating Storage At Sea

Dropping Prices and Supply Glut Sends Oil Into Floating Storage At Sea

There is so much surplus oil sloshing around right now, some of it is being stored on tankers at sea.

It's well known that there is a glut of oil in the United States because of a lack of infrastructure and the ban on exports. A surge in production, coupled with tepid demand, has caused prices to decline by about 13 percent since June: West Texas Intermediate (WTI) is trading at a price discount.

And those declining prices have led some commodity traders to decide that excess oil is better left at sea. There are now 25 to 50 million barrels of oil in floating storage, equivalent to more than two days’ worth of demand for the entire United States.

Related: With LNG Export Battle Won, Are Oil Exports Next?

The trend is not necessarily due to the lack of physical capacity to store oil, but largely because of the dynamics of modern day oil trading.

Spot prices for Brent crude, the international oil benchmark, have fallen below futures prices for the first significant period of time since 2011. By purchasing oil on the spot market, commodity traders can sell a futures contract on that shipment, and hold onto the oil at sea until the deal matures. Having paid a lower price – for example, around $98 per barrel as of mid-September – and selling a futures contract for delivery in October 2015 at $100 per barrel, the trader can pocket the difference when the deal is completed. The whole trend was nicely laid out in a recent Wall Street Journal story.

The margin may not seem like much, but according to the WSJ, it only takes a difference between the spot market and future market of about 70 cents in order to make a profit. The opportunity has not only attracted traders of physical barrels of oil, but also financial investors, who have jumped into the fray.

There are risks to this investment strategy. Storage costs and interest rates could rise, as the WSJ noted. Also, if spot prices decrease further in the months ahead, opening up a wider gulf with the futures price, traders will have missed out.

Another factor is the strength of the U.S. dollar, the currency in which oil is conventionally priced. A stronger-than-expected dollar will send oil prices lower. Moreover, as oil prices are notoriously volatile, it is unclear how long the price spread will last.

Why is there such a difference in price to begin with? For Brent, higher futures prices indicate that traders think that oil prices have slid far enough. Having potentially bottomed out, the markets apparently think that Brent will rise once again. For example, if OPEC cuts back on production, or the global economy picks up its pace of growth, prices would increase. This leads to futures prices settling at higher prices than what oil is sold for today.

Related: Western Sanctions Halt Exxon’s Drilling In Russian Arctic

But such a scenario is far from a certainty, given today’s global economic environment.

WTI is a different story. WTI was selling for $92.50 during intraday trading on Sept. 19. But WTI futures for delivery on Dec.19 – three months from now – is going for $86.75 per barrel. This is the reverse of the situation for Brent, and it suggests that the markets think that oil production in the United States will continue on its upward trajectory. Meanwhile, with flat demand and a dearth of infrastructure, oil will continue to pile up and bring down prices.

This phenomenon may seem odd, but it has happened before. In April 2009, more than 70 million barrels of oil were in storage awaiting future delivery. Of course, that was during the depths of the global economic recession, and spot prices at the time were trading for around $50 per barrel. The gap between the spot and futures prices was a wide one because the markets were relatively confident that the world would eventually dig out from the economic malaise.

But the return of significant storage for futures delivery suggests that the world is once again experiencing a period of oversupply.

By Nick Cunningham of Oilprice.com

More Top Reads From Oilprice.com:




Back to homepage


Leave a comment

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News