N. Sea floating volume builds amid fresh slowdown in European demand

New York — The floating storage levels of the Brent, Forties, Oseberg, Ekofisk and Troll (BFOET) grades in Northwest Europe have edged up to their highest levels since the peak of Europe's coronavirus lockdown from March to June, according to data intelligence company Kpler.

The week beginning Oct. 12 saw floating volumes at 6.2 million barrels, the highest level since the week beginning June 8, data from Kpler showed.

"Forties simply keeps getting stored on floating vessels. Brent as well is floating," a source said. "I think the arbitrage east has to open to place these barrels, or they will continue to pressure the North Sea market."

The increased storage comes at a time where the contango across paper markets has been sustained, amid limited prompt demand.

Moreover, the weaker prompt has led to a steeper contango, making floating storage look more attractive.

S&P Global Platts assessed the Brent Contracts for Difference contango at 67 cents/b between Pricing Week 1 – currently Oct. 19-23 – and Week 8 – currently Dec. 7-11. While this structure helps incentivise storage, it is not close to the structure seen at the start of April for example when the contango between Week 1 – March 30 to April 3 – and Week 8 – May 18-22 – was assessed at $6.10/b.

Taken together, calendarized ICE Brent futures contracts and Dated to Frontline swaps contracts allow calculation of a physical Brent forward curve. This financially calculated Brent last showed a 36 cents/b contango structure between Months 1 and 2 – currently November and December. This contango structure has been steady in recent weeks and has averaged 40 cents/b during October. Similarly, the structure between December and January was last assessed in a 32 cents/b contango.

While shorter Dated Brent basket loading programs through August and September, which came as a result of maintenance, provided some support to the European crude balance, October programs are back up to typical lengths with limited recovery in demand seen to absorb these barrels.

A lack of arbitrage opportunity east has also been a factor in a build-up of supply in Europe, as North Sea grades struggle to compete with other grades from West Africa and Latin America, for example, with limited space left in 2020 quotas. Typically North Sea grades such as Forties and Johan Sverdrup head to Asia.

While some Johan Sverdrup has continued to flow to Asia, Forties hasn't seen the same level of demand. As a result, a majority of the floating storage is Forties, accounting for 4.56 million barrels of the 6.2 million floating from the week beginning Oct. 12.

North Sea regional grades are not yet experiencing the overhang being seen for the BFOET grades, sources said Oct. 21.