Gas oil market out to sea

Sam Fletcher
OGJ Senior Writer

Barring an extremely cold winter and stronger-than-expected economic recovery, the phenomenon of gas oil inventories stored at sea in transport vessels will continue next year, said analysts at Deutsche Bank AG.

Best estimates indicate nearly 100 million bbl of gas oil are now in floating storage around the globe, much of it off Europe. However, weather forecasters expect above-normal temperatures in northern Europe through much of December.

“While floating gas oil has been symptomatic of the global downturn, it’s now become a fundamental overhang on the market as industry participants struggle to make sense of this phenomenon in oil supply-demand balances,” Deutsche Bank analysts reported Dec. 4. “This will continue to weigh on the gas oil complex and margins next year at a time when refiners, particularly in the US and Europe, are struggling to cope with the rapid increase in new refinery capacity in China and India.”

Because there is no official reporting system, it’s difficult to say how much gas oil is stored in vessels at sea. The International Energy Agency estimated 60 million bbl of oil and 80 million bbl of distillates were in floating storage at the end of October. The Organization of Petroleum Exporting Countries put the numbers at 40 million bbl of crude and 90 million bbl of distillates. ICAP Shipping International Ltd. projected 90 million bbl of distillates in floating storage by the end of November. That is expected to grow to 97 million bbl in December—a fivefold increase in floating distillate stocks within 9 months. Olivier Jakob at Petromatrix, Zug, Switzerland, earlier said, “If the current rate of increase in distillate floating stocks continues, we would have at the end of March 2010 more distillate stocks on water then we had in March 2008 in the total onshore US (OGJ Online, Nov. 30, 2009).”

Based on their reading of industry surveys and media reports, Deutsche Bank analysts estimate global gas oil inventories on the water has grown to 100 million bbl, up from estimates of 24 million bbl as of last April.

Converging factors
The highly unusual build up of seaborne inventories of gas oil (diesel and heating oil) began early this year as the result of a combination of factors. Deutsche Bank analysts said, “Shipping rates were crushed due to the recessionary impact on oil flows and that coincided with the completion of a significant number of new vessels that were added to the global fleet. The recessionary impact on diesel demand was global, but more pronounced in the US and Europe, and also resulted in a persistent and deep contango…as wide as $3.15/bbl in June this year, on a monthly average basis.” With onshore inventories already near capacity, it became economic for the first time to store gas oil on vessels for an extended period.

Some portion of floating gas oil, albeit not the dominant share, is stored on very large crude carriers, each of which can hold up to 2 million bbl, Deutsche Bank reported. “The use of VLCCs to transport clean products such as gasoline or gas oil is hardly if ever done given contamination issues. Transporting gas oil in a vessel that had been carrying crude oil likely will result in gas oil product that is off-specification and unmarketable,” analysts said. “The VLCCs being used to store gas oil are brand new to the fleet; hence their holds have not been coated with crude so they can carry clean products without resulting in off-spec product.”

Meanwhile, refinery runs have remained low so far this year, down 540,000 b/d on average from a year ago. Deutsche Bank analysts reported gas oil production is sharply lower at an average 300,000 b/d. They estimated 4% of US refinery capacity was idled this year because of unprofitable margins. In Europe, at least 8% of capacity was idled “either permanently or for an extended period of time due to poor margins,” they said.

Bank analysts foresee three possible scenarios for heating oil:

• An average winter would result in lowering heating oil demand by 8.6% for October 2009 through March 2010. “This is exaggerated due to a very cold winter…that boosted demand by 14% October 2008 to March 2009,” they said.

• If this winter proves to be the coldest in 5 years, analysts said, heating oil demand would climb 120,000 b/d above the baseline but still down 3.7% for the year.

• The warmest winter in 5 years would slash demand 170,000 b/d below the baseline, down 15% on a year-on-year basis.

(Online Dec. 7, 2009; author’s e-mail:

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