Unwanted Diesel, Jet Ships Could Sink Oil Prices

Backlog of vessels at port threaten loading delays; ships with half a million tonnes taking the long route to Europe.

 Unwanted diesel and jet fuel cargoes are backing up outside Europe's ports and taking longer, slower routes around the southern tip of Africa, traders say.

A symptom of the world's excess of oil, it also paints a gloomy picture of the chance of an oil price rebound.

The abundance of crude that roiled commodity markets and turned the balance sheets of oil majors on their head also encouraged under-pressure European oil refineries to run at full clip.

Refineries from Rotterdam to India to Louisiana, drunk on cheap crude, ran regardless of whether the world wanted what they were making. Meteoric demand growth earlier this year for products such as gasoline masked the surplus.

But the armada of distillate ships en route to Europe has created delays at ports and is starting to drive up the costs of moving all oil products around the world.

The parade of vessels with no homes has cast a doubt on the chance of battered crude prices can recover in the near term.

"The ceiling may be nearing, with reports of discharge delays and the potential for forced products storage," shipping company Gibson said.

There are now vessels carrying at least half a million tonnes of distillates sailing around Africa's Cape of Good Hope, rather than via the faster, more efficient Suez Canal. Others, such as the Captain Paris, the Ocean Tiara and the Portman Square, are parked off Gibraltar while they wait to find a home, rather than sailing directly to Europe's increasingly crowded Amsterdam-Rotterdam-Antwerp storage hub.

Traders of other products, including gasoline, said the immense amount of diesel arriving is also amplifying the fight for on land storage tanks.

With deepening contango, a structure under which future prices for oil products are higher than current levels, some traders can make money with these types of slower voyages, while others have already taken positions with proper floating storage vessels.

But with close to record highs of 6 million tonnes of gasoil stocks in the Amsterdam-Rotterdam-Antwerp hub, according to industry monitor Genscape, others are simply running out of options. The combined tanks are filled to more than 76 percent of capacity, with some at more than 90 percent.

Additionally, ultra-low water levels on the Rhine river are keeping these products from sailing out of storage and into Europe's industrial heartland.

"Unless it starts raining, I do not know where it can go but stay on the water," a distillates trader said of any pending cargoes.

Despite this, refineries have not yet shown any signs of cutting back their output. Rather, falling Brent crude prices are encouraging them to keep the taps flowing unchecked - a development likely to put even more pressure on storage, ships and oil prices.

"Margins have improved as the dated Brent market continued to slump," one trader said. "I don't think we will have run cuts for a while."

By Libby George and Ron Bousso