ANALYSIS-Swollen US crude stockpiles mask global drawdown

Thu Aug 19, 2010 10:31pm BST

* Oil stored at sea fell sharply in recent months -brokers

* Analysts, banks see oil price rising over rest of year

* 57 Days of forward demand cover in U.S. oil storage

By Joshua Schneyer

NEW YORK, Aug. 19 (Reuters) - U.S. oil inventories are at their highest levels in at least 20 years, but a sharp reduction in crude stocks held on tankers at sea shows global supplies have been tightening -- a more bullish picture which should send prices higher.

Following Wednesday's release of government figures showing U.S. crude and oil product stocks at historic highs, benchmark U.S. oil futures slid to a six-week low of $73.83, 11 percent off their summertime high near $83 in early August.

Total oil stocks in the country rose 5.9 million barrels to 1.130 billion barrels last week, the highest since EIA began releasing weekly data in 1990. Oil stocks are up 40 million barrels since early June.

But oil held in tankers offshore, which is much harder to track, may have dropped by 45 million barrels globally during June and July, to around half their peak level above 100 million barrels last year, according to shipbrokers.

"It would be safe to assume that it is (now) less than half that (100 million barrel) number," said George Los of Charles R. Weber shipbrokers in Connecticut.

Los has seen no recent charters of super-tankers for crude storage purposes, compared with last summer when he was tracking at least 20 such temporary leases. Each Very Large Crude Carrier holds about 2 million barrels.

"Demand for floating storage has all but disappeared," Gibson Tanker Report said earlier this month.

According to Gibson, oil stored globally in tankers offshore fell by 30 percent in July alone, or 25.6 million barrels, to around 59 million barrels.

Much of the crude oil still in tanker storage is from Iran, which has had trouble selling crude due to recent international sanctions aimed at halting its uranium enrichment program.

Another broker, ICAP, said global demand for offshore storage of refined products such as jet fuel may again be rising this month, since refiners are turning far more crude into fuels. [ID:nLDE67G0Y6]

Trading firms turned major profits in 2009 by storing crude on tankers for later delivery as crude prices further out on the futures curve traded at sharp premiums, known as contango.

As prompt fuel demand rises globally amid an economic recovery, those premiums have fallen and offshore cargoes are coming in from the cold, drawn from tankers and into cheaper onshore storage where they are tallied in official U.S. stock data. That contributes to the perception of a supply glut.

A global drawdown of 40 million to 45 million barrels from tankers in June and July far outweighed a reported build of 21 million barrels in global onshore stocks during the same period, Goldman Sachs analysts said this week.

That could represent a significant, and bullish, net stock draw during a season when stocks would typically rise.

"It looks like from a global perspective we are now in a period of drawdown," said Goldman Sachs analyst David Greely.

"The draw from offshore storage has been large, and that can exacerbate some of the build in stocks onshore."

Goldman estimates global oil demand now exceeds supply by around 600,000 barrels per day on a seasonally adjusted basis. Tightening physical markets are one reason Goldman is maintaining its forecast that benchmark WTI futures will rise into the $85 to $95 a barrel range by the end of 2010.

Another key supply-demand metric also tells a less bearish story than inventory data alone. Despite the brimming U.S. stock levels, forward cover -- the measure of how many days of U.S. consumer demand could be met with existing U.S. onshore stocks of crude and products -- stands at just 57 days, below a 2009 high of 62 days, and a far cry from the 70 days forward cover the last time U.S. oil stocks reached comparable levels, in 1990. (Graphic: link.reuters.com/wut75n )

CONTANGO SLIMS

Another sign of tighter markets is the narrowing crude contango, which is usually steepest in periods of poor near-term demand for oil. On Thursday, West Texas Intermediate for front-month delivery CLc1 traded at a discount as slim as 25 cents to barrels for delivery a month further out, compared with an average front-to-second month discount of $1.58 in 2009.

Stocks at Cushing, Oklahoma, the delivery point for U.S. crude futures, remain above 37 million barrels, near a 37.9 million barrel record reached in May, and well above 2009 levels, when rising Cushing levels contributed to huge contango discounts.

BNP Paribas said in a research report this week that WTI's contango was surprisingly shallow given high inventory levels, and may still widen. But the bank still sees WTI prices rising as the year goes on, to an average of $89 a barrel in the fourth quarter.

Separately, the EIA forecasts WTI oil prices will average $80 a barrel during the second half of 2010, rising to close the year near $85 a barrel.

EIA expects U.S. liquid fuels demand to rise for the first time in 5 years this year. The gains would add to stronger growth in countries like China and India, helping to erode stocks.

"It would be wrong to paint a universally bleak economic picture," said JP Morgan in a note on Wednesday. The bank said Indian gasoline demand is up almost 15 percent from-year ago levels, as vehicle sales soar.

U.S. growth is far more modest, with gasoline demand hitting 9.46 million barrels a day last week, up 2.8 percent from the same week of 2009, EIA data showed. Distillate demand was up 6 percent from 2009 levels.

(Editing by David Gregorio)

((Email: joshua.schneyer@thomsonreuters.com; +1 646-223-6051; Reuters Messaging: joshua.schneyer.reuters.com@reuters.net))

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