North Sea Oil Prices Rebound as Glut of Floating Crude Clears

Oil Swings Back Into a Bull Market
  • Benchmark grades in tankers fall to five million barrels
  • Forties crude traded at highest level in two months this week

The glut of crude oil stored in ships on the North Sea is finally starting to dissipate.

Demand for the commodity has increased as traders take advantage of remaining discounts before maintenance begins at the U.K.’s largest oil field. The result: a whittling away at the backlog of floating storage that has persisted for months.

The “timing is right” for buying interest in North Sea crudes to rise, David Reid, an analyst at Vienna-based JBC Energy GmbH, said by e-mail. Planned work at the 170,000 barrel-a-day Buzzard field, scheduled to begin in mid-September and last about a month, will curtail production and push up prices, he said.

Vessels storing crude on the North Sea are moving to port as oil demand rises.
Vessels storing crude on the North Sea are moving to port as oil demand rises.

The movement of crude-laden vessels to port reverses a floating-storage build-up that peaked at more than 11 million barrels in late July. Earlier in the summer, faltering demand spurred by unexpected refinery strikes led to excess storage of the fuel at sea. Now, with discounts vanishing, it’s more profitable to send the oil to shore.

Declining Volumes

Crude kept in North Sea tankers has declined by more than 50 percent, to five million barrels, within the last three weeks, according to ship-tracking data compiled by Bloomberg. Ships loaded with Brent and Forties oil, two of the region’s primary grades, discharged their cargoes in Germany and Rotterdam this week after being anchored for as many as four months.

Other factors helping to reduce the excess in North Sea storage include supply disruptions in Nigeria and an increase in crude purchases in Asia, according to Amrita Sen, chief oil analyst at London-based Energy Aspects. “Chinese buying in particular is returning slowly,” she said in an e-mail.

Forties crude, one of four grades used to price Dated Brent, the global benchmark, traded at a two-month high early this week. The grade last sold at a discount of 15 cents a barrel to that benchmark, versus 65 cents two weeks earlier, according to data compiled by Bloomberg. Meanwhile, the structure of derivatives used in the North Sea for speculation or hedging is shifting toward backwardation, an indication of a strong market where existing cargoes sell at higher prices than those for later delivery.

Brent futures on Thursday climbed above $50 a barrel into a bull market, capping a six-day run of price increases.

Price Rally

Crude moving out of North Sea storage is “consistent with what we’re seeing in the overall rally in prices,” Craig Pirrong, director at the Global Energy Management Institute at the University of Houston’s Bauer College of Business, said in a phone interview. An increase in demand will draw oil out of storage, and “it tends to come out in a run.”

Two supertankers and two smaller vessel loaded with Forties, Brent and Norwegian Oseberg crude remain off the U.K.’s shores. The two-million-barrel carrier Maran Thetis has been floating near Scotland’s Hound Point terminal since July 26. A similar vessel, the Front Ariake, is anchored at Southwold, England, after receiving Forties and Brent crude via two ship-to-ship transfers three weeks ago.

Loading disruptions and cancellations in the region may create more demand for any crude available, according to a survey of six North Sea traders. A Forties cargo was dropped from the September shipping schedule, and at least six cargoes had to defer their loading dates due to a slow restart of oil flows via the Forties Pipeline System, operated by BP Plc.

“You put stuff in storage for a rainy day,” Pirrong said. “The rainy day’s here, so you take it out of storage.”

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