Oil tankers are going nowhere — slowly

HOUSTON — From the Indian Ocean to the South Atlantic to the Gulf of Mexico, giant supertankers brimming with oil are resting at anchor or slowly tracing racetrack patterns through the sea, heading nowhere.

The ships are marking time, serving as floating oil-storage tanks. The companies and countries leasing them for that purpose have made a simple calculation: The price of oil has fallen so far that it is due for a rise.

Some producing countries are trying to force that rise by using the tankers to withhold oil from the market, while traders are trying to profit by buying cheap oil now to store and sell at a higher price later. Oil storage has become so popular that onshore tank capacity is becoming scarce.

Six months ago, companies up and down the energy pipeline were rushing oil to market, struggling to keep up with galloping demand and soaring prices. With the global economy slumping and people driving less, demand for oil has plunged — and the same companies are acting in ways that would have been unimaginable until recently.

Oil producers are shutting down rigs, refiners are producing less gasoline, and investment planning throughout the industry is in turmoil.

The problem for the companies is not just that prices are lower, but that they have become volatile, historically, a sign of an unstable market whose direction is uncertain. Between Christmas and a week ago, oil prices soared 40 percent, only to reverse course almost as sharply in recent days. Last week, the price of a barrel of crude oil dropped by nearly 12 percent in one day.

"The oil markets are suffering acute whiplash," said Daniel Yergin, an energy consultant and author of "The Prize," a history of world oil markets. "Price volatility is adding to the sense of shock and confusion and uncertainty."

Price swings

The wild price swings are a continuation of last year's trends, when the price of a barrel of oil swelled from just below $100 in January to nearly $150 in July before collapsing to less than $35 last month. Daily oil prices rose or dropped by 5 percent or more 39 times, versus four times over the previous two years. The only recent year that was comparably volatile was 1990, the year Iraq invaded Kuwait.

A year ago, oil producers and refiners could not move their products fast enough to meet growing world demand and chase rising prices. Now, with demand and prices slumping, they are sitting on 327 million barrels at tank farms around the country, particularly at Cushing, Okla., a major storage hub and a crossroads for pipelines. That is more than 40 million barrels more in storage than this time last year, and more than 30 million barrels higher than the five-year average.

The buildup has come during the past 100 days or so, as consumption of oil fell behind imports and domestic production.

With storage tanks filling up onshore, private and national oil companies, refiners and trading companies are storing an additional 80 million barrels aboard 35 supertankers and a handful of smaller tankers, the most in 20 years, according to Frontline, the world's largest owner of supertankers.

Reasons differ

Different players have different reasons for storing oil, whether onshore or offshore.

National oil companies are hoping to reverse the slide by holding oil off the market. Iran alone reportedly is storing crude oil in up to 15 tankers in hopes higher prices will prop up its economy.

Private trading companies such as Vitol and Phibro are storing oil in expectation of higher prices. They are taking their cues from markets where traders buy and sell contracts for future delivery of oil, which are signaling higher prices down the road.

Adam Sieminski, chief energy economist at Deutsche Bank, noted that a trading company can buy oil at the spot price of nearly $40 a barrel, store it and sell a contract to deliver it in a year for about $60. "You pay between $6 and $10 a barrel to store it, and you can make $10 a barrel," he said. "That's why Cushing is filling up rapidly and people are leasing tankers."

One small example of how the price uncertainty has affected behavior is Devon Energy, an Oklahoma City company that in recent years has excited the energy world with announcements about expensive new investments in Canadian oil sands and deep-water oil-exploration projects.

The company recently put off announcing details of its drilling program. Chip Minty, a Devon spokesman, said: "The volatility ... is making it more difficult to plan a drilling program that is funded through cash flow. Everybody is laying down rigs."

Devon's caution is a sign that the go-go days of investment in the oil patch are gone.

Schlumberger and Halliburton, the two top oil-service companies, are cutting jobs. Many oil companies are delaying investments in their more expensive projects, such as mining the Canadian oil sands. A couple of refiners face bankruptcy.

The volatility is showing up at the gasoline pump. Drivers who only a few weeks ago were finding relief from the summer's $4-a-gallon gasoline find that the average national price for unleaded regular gasoline has surged from $1.62 to $1.79 since Dec. 30.

Oil volatility has complicated the efforts of auto firms to plot future strategies. Toyota suspended production at one plant that builds the Tundra pickup when gasoline prices soared last summer. The automaker then delayed completion of a second plant to build the Prius hybrid when falling gas prices led to weakening demand for the fuel-efficient model.

The gyrations in prices affect shipping and other businesses as well.

Cathay Pacific, one of many airlines that use fuel-hedging strategies, recently acknowledged it had hedged losses of hundreds of millions of dollars because of the collapse in fuel prices.

The slowdown in oil investment is so rapid that some analysts think it is only a matter of time before shortages appear that will push oil prices to new heights and damage the economy.

From day to day, the price swings reflect a push and pull among the various players in the market, and diverging geopolitical and economic trends.

After months of sharply dropping prices, the psychology on the oil markets appeared to shift strongly after Christmas, sending oil prices up from just below $34 on Dec. 19 back to almost $50 in early January.

Traders were putting their investment money back into oil as The Organization of the Petroleum Exporting Countries (OPEC) appeared to be serious about cutting output. Fighting between Israel and Hamas in Gaza appeared to threaten a broader Middle East conflict that might crimp supplies. The Russia-Ukraine conflict over natural gas threatened European supplies, raising fears Europeans might have to switch from natural gas to oil.

But the mood shifted just as quickly last week when the Energy Department reported that crude-oil inventories at Cushing had climbed by 4 million barrels, to 32 million barrels, for the week that ended Jan. 2, the highest since the government started tracking supplies in 2004. That number jumped again in a report Wednesday, to 33 million barrels, near Cushing's operating capacity of 35 million barrels.

Spooked by the signs of surplus, traders drove the spot price of oil down to $37.28 a barrel Wednesday.

Profit margins

Gasoline, meanwhile, has become pricier at the pump because refiners have been producing less of it. Profits from refining have been so thin over the past several months that refiners have been earning little, or even losing money, on producing gasoline. So they are storing oil or selling it to traders, or retooling their refineries to produce less gasoline and more products with better profit margins such as heating oil, diesel or jet fuel.

Valero, for instance, has cut gasoline supplies by extending maintenance time at some refineries and cutting production at eight of 16 refineries.

"There is not a lot of incentive right now to produce gasoline because there is lots of it," said Bill Day, a spokesman for Valero, the nation's largest refiner.

While Goldman Sachs has predicted the slumping global economy soon will drive the price of oil down to $30, a top Kuwaiti oil official predicted recently that big production cuts by OPEC soon will jack oil prices back up.

"It's a sure bet that both will be right," Yergin said, basing his opinion on the sharp swings of recent days.