Oil Prices At Risk Of Slipping Again As Traders Sell Off Stored Crude Supplies

Crude oil stored in barrels and tankers is seeping back into the global market. Traders who have been stashing supplies in recent months are selling back some of the fuel -- a move that could pressure prices downward as the oil glut expands, according to media reports.

Traders, including energy giants BP PLC and Royal Dutch Shell PLC as well as smaller outfits such as Trafigura, Vitol and Gunvor, have been storing oil in land- and sea-based tanks to capitalize on low crude prices, which tumbled by nearly 50 percent from last June to January. After buying the oil, companies generally turn around and sell it at a higher price but for a later delivery date, and their customers see the long-term contracts as a hedge against future volatility.

The strategy works best when oil prices are weak. As Brent crude, the global benchmark, stabilizes around $60 a barrel, storing oil is becoming less profitable, and some traders are selling off their supplies, Reuters reported Monday. At least 50 million barrels of oil are currently stored in tankers -- equal to about one month’s consumption in Britain -- though it’s unclear how much oil has been sold in recent weeks, according to the news agency.

The reinjection of stored oil into the market could exacerbate the global oversupply, which has been building over the past year as production in the U.S. and other countries outstrips worldwide demand. “A supply overhand of about 1.5 million barrels a day should build as seasonal demand eases,” ANZ bank said this week in a note cited by Reuters. “A lack of production cuts will send prices lower.”

Sustained production by U.S. shale oil drillers is prompting a separate dilemma in the oil storage space. U.S. crude supplies are at their highest level in more than 80 years, approaching 70 percent of the nation’s storage capacity, according to the U.S. Energy Information Administration. A major storage hub in Cushing, Oklahoma, is expected to reach its maximum capacity this spring, the Wall Street Journal reported last week.

Commercial storage units in Europe, South Korea, South Africa and Japan are under similarly high strain. Across all industrialized nations, commercial oil and petroleum product stockpiles are expected to reach an all-time high of 2.83 billion barrels by the middle of this year, the International Energy Agency has warned.

Some analysts predict that if storage units fill up, prices could dip even lower this year, as producers are forced to sell crude at a discount to the few remaining buyers with spare storage space, the WSJ noted. Goldman Sachs said this week that it expects U.S. crude prices could drop to $40 a barrel, from $49.80 a barrel on Monday, as a result of the larger inventories.