Sustained oversupply could force crude storage offshore

Widening spreads bring floating potential `back into play'

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The global oil glut may soon expand to the ocean.

While traders are already cashing in on the surplus by housing oil in onshore tanks across the globe -- including on the tiny Caribbean island of St. Lucia-- expanding the storage to tankers at sea may near a point where it becomes profitable, according to Citigroup Inc., Goldman Sachs Group Inc. and IHS Maritime & Trade. A structure called contango, when the price of a commodity to be delivered in the future is higher than if it was sold today, has been moving in the right direction.

Vessels laden with oil, parked offshore from Singapore to the Gulf of Mexico, became a feature after the global financial crisis as the widening contango allowed traders with access to storage to lock in a profit. As the spread expanded again amid a global supply glut, tanker owner Frontline Ltd. fielded inquiries last month about options to house crude at sea.

"Even though the contango is not wide enough yet, it could become so if OPEC continues to overproduce relative to demand," Frode Moerkedal, an analyst at Clarksons Platou Securities, said by e-mail.

With the Organization of Petroleum Exporting Countries already pumping above its 30-million-barrel-a-day quota for more than a year, Iran's plans to boost output after sanctions are lifted threaten to worsen the oversupply -- a market condition that typically deepens a contango. That could see more oil stored at sea during the fourth quarter, according to Andrew Scorer, an analyst at IHS Maritime & Trade.