Oil players stockpile cheap crude on tankers  

The Houston Chronicle has an article on the "major players stockpiling oil in tankers" story - Oil players stockpile cheap crude on tankers.

Oil demand has plummeted along with home prices and stock market indexes, but discerning where energy demand could go in 2009 isn’t easy.

That’s why, as oil markets attempt to calibrate in the face of this recession, some traders, refiners, big oil companies and other interests have been buying cheap oil in recent weeks and squirreling it away in storage tanks and ships with plans to unload it months from now when prices are higher.

It’s difficult to quantify exactly how much oil is being stored in ships, but Frontline LTD, which runs one of the largest crude supertanker fleets, estimates 80 million barrels of oil are drifting slowly on the high seas—roughly equal to a day’s oil consumption for the entire world.

Storage space for oil has become so tight in the U.S. it’s tough to find room onshore.

According to the latest report from the U.S. Energy Information Administration, 339 million barrels of crude are in commercial stocks — a 16 percent increase over this time last year and well above the U.S. average.

As oil demand drops, crude has filled tank farms in storage hubs like Cushing, Okla., and packed an underground network of pipelines.

The demand slump and supply glut are forcing some domestic producers to pull back on exploration for new oil and production of existing reserves.

U.S. oil production is down 2 percent year-over-year, and imports of foreign crude have dipped, according to the Energy Information Agency, a unit of the Department of Energy.

In the last four months, 807 drilling rigs have been taken out of commission — a third of the total that were operating during drilling’s peak at the end of September, says Jeff Dietert, an analyst with Simmons & Company International.

In addition to dropping 70 percent since its record high closing price of $145.29 a barrel on July 3, the oil market has gone into contango, a condition in which the current price of crude is less than contracts for future delivery of oil months from now. That’s motivating players in the energy market to stockpile.

Here’s why: Oil purchased Friday for $41.68 a barrel could immediately be sold through a forward contract for September delivery at a price of $52.85 a barrel. That’s a gross profit of more than $11 per barrel before storage costs.

Those costs vary, but tanker rates have been dropping and Dietert says chartering a vessel that holds up to 2 million barrels of oil is running about $60,000 a day. That means storing oil at sea for six months would cost roughly $1 per barrel per month, leaving a profit of more than $5 per barrel.