A glut of crude in spot markets is forcing the price of oil for immediate delivery below forward futures costs, and it could soon be profitable to buy oil, store it, and sell it later in the year at higher prices.
Three years ago - the last time oil prices fell sharply on world spot markets - dozens of supertankers were moored off Scotland and along the south coast of England as floating storage.
Nearby spot oil prices have almost fallen enough to make that happen again and the trend is likely to continue, opening up a trading window shortly, analysts and shipping firms say.
"We could soon see a return of floating storage," said Olivier Jakob, analyst at consultancy Petromatrix in Zug, Switzerland. "For floating storage to be workable, the spreads need to widen a little bit, but not much. We aren't far away."
Oil prices have fallen 30% from this year's peak over $128 per barrel, with nearby North Sea Brent crude oil futures on the InterContinental Exchange about $90.
The resumption of Libyan crude oil production after almost a year of civil war, a big rise in Middle East oil output, global economic slowdown, and the closure of several oil refineries have left the prompt oil market heavily over-supplied.
Brent for immediate use is trading at a discount of about $1 to August futures and oil for delivery in a year's time is about $2 dearer, in a price structure known as "contango".
The contango is not yet quite deep enough to pay for oil storage and other costs such as financing, but it has been widening steadily this month and storing oil at sea could soon be a viable option for oil companies and trading houses.
This week money managers controlling billions of dollars of pension funds and other investors will decide where to allocate their portfolios in the third quarter and they are likely to move out of prompt Brent if the contango looks set to persist.
A contango brings "roll losses" for investors if they have to sell out of a weak front futures contract and buy more expensive later months as prompt months expire.
"Even if spreads are not wide enough yet to bring floating storage, they will encourage traders to hold cargoes longer," Jakob said. "That will put extra pressure on prompt prices."
Copyright 2012 Thomas Crosbie Media Ltd. All Rights Reserved.
(Originally published June 26, 2012, in the Irish Examiner.)