Fleet of tankers store fuel at sea

By Luke Pachymuthu and Ikuko Kao

DUBAI/LONDON (Reuters) - A deep drop in demand has forced many oil companies to use tankers floating at sea to store surplus refined products, with the volume off Europe equating to more than a quarter of the world's daily fuel use.

Shipbrokers and oil traders said at least 24 million barrels of gas oil, used for diesel or heating oil, and jet fuel were being stored on more than 30 floating long-range tankers in Europe. Some traders say the stored volume might be even larger and would add to the pressure on bearish products markets.

The world consumes about 84 million barrels of oil a day.

"There are quite a lot of distillates stored in floating storage. Jet is unusual," an oil products trader said. "Current contango covers the storing cost, but demand is so weak and we do not know when we can move jet."

Contango, a market condition in which near-term fuel contracts are cheaper than those for later delivery, provides a financial incentive for companies to store oil, which, in turn, deepens the contango.

Some Middle East countries have taken advantage of the market structure and relatively cheap freight to store products.

Oil consumption in the region has been relatively steady.

In Europe, demand has dropped because of economic recession and the contango has added to a big build-up in stocks.