Oil Glut Seen Setting Sail as Contango Widens: Chart of the Day

Get ready for the revival of an oil trade that became a hallmark of the 2008-09 global recession: tankers storing millions of barrels of crude off the coasts of Singapore, eastern England and in the Gulf of Mexico.

The CHART OF THE DAY compares today’s forward curve for oil and the one from six years ago. It shows how prices in August are about $5.50 a barrel higher than in February. To cover the costs associated with storing oil at sea -- hiring a ship, fuel, insurance, finance -- that gap needs to widen to $6.50 a barrel, according to E.A. Gibson Shipbrokers Ltd. When future costs are above immediate ones, the market structure is called contango, the opposite is backwardation.

Brent oil collapsed by 48 percent in 2014, its biggest slide since 2008, as members of the Organization of Petroleum Exporting Countries kept pumping oil amid a global surplus that they say was caused in part by surging crude production from U.S. shale formations. Qatar estimates an oversupply of 2 million barrels a day. The price slump in 2008 was caused by a global recession. The contango between first-and six-month futures back then got to $12.29 a barrel.

“We’re forecasting very big stock-builds in the first half of next year, more than 1.5 million barrels a day so I think the contango markets are here to stay for the foreseeable future,” Mike Wittner, head of oil market research at Societe Generale SA, said by phone from New York on Dec. 30. “And could we see super-contango in the first half, which will encourage all kind of stock-building in whatever tank is available whether it’s on-land or floating? Yes, strongly yes.”

As much as 50 million barrels of oil were being stored at sea by February 2009, helping to curb tanker supply, the International Energy Agency, an adviser to 29 nations, estimated at the time.

Over six months, the biggest ships used for the trade would typically consume around 2,400 tons of bunker fuel and 548 tons of marine gasoil, according Svetlana Kourmpeti, senior market analyst at E.A. Gibson, the London-based ship broker. Cargo insurance costs around 0.1 percent of the value of the cargo per month and financing is typically around 4 percent per year, she said.