Traffic Jam on the High Seas

by: Paul Kedrosky

There is a kind of oceanic traffic jam out there among very large crude carriers (VLCCs), with something like 7% of them storing crude oil off the coast of Europe, Asia, or North America in anticipation of higher prices later this year. Such are the joys of contango -- higher forward prices making it profitable to store petroleum for future sale -- but it is a huge gamble. If the people contracting for such VLCCs are wrong, their carrying costs mount and it becomes likely that they just dumb the product on the markets, further depressing prices.

Check the following figure (from EA Gibson) of the current storage situation for both petroleum and clean products, like gasoil. While crude sea storage has declined from its peak earlier this year, clean products are floating out there is ever larger amounts.