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Contango on European ICE Gasoil May Boost Storage Bets

A widening European gasoil futures contango may prompt traders to fill storage tanks with excess supply at a time when winter demand typically peaks.

Front-month January gasoil futures on London’s ICE Futures Europe exchange fell 25 cents to $768 a metric ton at 4:36 p.m. local time, $4.50 cheaper than the February contract. The spread has nearly doubled since Nov. 29. It will be profitable for traders to store the heating fuel and sell it later at a higher price if it rises to at least $7, a Bloomberg survey of five traders and brokers involved in the business showed.

European consumers, particularly those in Germany, the continent’s largest heating oil market, stocked up on gasoil this year well before cold winter weather set in. Refineries have ramped up production of the oil-product, creating a glut of the fuel at a time when demand is usually highest. Temperatures in Berlin will fall to as low as minus 13 degrees Celsius (8.6 Fahrenheit) on Dec. 19, Customweather Inc. data on Bloomberg show. The average low for this time of year is 0 Celsius.

“It makes sense for European refiners to put supplies into storage,” and sell in the future, said Roy Jordan, a London-based research consultant at Facts Global Energy.

It costs about $6 a ton per month to rent storage tanks, and another $2 a ton per month to finance the storage, one of the people in the survey said. A market is in contango when supplies for nearby delivery trade at a lower price than shipments for later months.

Gasoil stockpiles in Europe’s Amsterdam-Rotterdam-Antwerp trading hub fell to 2.91 million tons in the week to today, data from PJK International BV, an industry consultant based in the Netherlands, showed. Inventories are still near their highest level in more than a year.

Cold Spell

Sales of gasoil in Germany fell to 1.92 million tons in November, down 6 percent from October, the country’s petroleum association Mineraloelwirtschaftsverband said yesterday.

“The market is, for now, quite comfortable despite the cold spell,” Olivier Jakob, managing director of Switzerland-based consultant Petromatrix GmbH, said by phone yesterday. “European consumers have been filling up the tanks before the start of the winter.”

A widening of the spread between January and February delivery gasoil to $10 could spur a resurgence of bookings to store the fuel on tankers, the survey showed.

“It is winter, the time for heating oil demand and the contango on ICE gasoil is widening, not narrowing,” Jakob said. “With a heavy schedule of new-build tankers being prime candidates for floating storage we will have to watch for the floating storage economics to redevelop if the front contango on ICE Gasoil starts to spill into the following months,” he said.

Floating Storage

Last year, the volume of middle distillates stored at sea peaked at 90.27 million barrels in November, with more than 70 percent stored off the coasts of northwest Europe and the Mediterranean, according to data from London-based shipbroker ICAP Shipping.

Gasoil’s crack, a measure of refining profit, rose to $11.13 a barrel, up 21 cents from yesterday. Brent crude for January fell 0.4 percent to $91.88 a barrel.

The prospect of continuing cold weather and rising demand later this winter “is going to create an opportunity for that crack spread to widen, and therefore you wish to take advantage of that probability by putting gasoil into storage,” Jordan said.

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