By Ron Bousso and Libby George
LONDON (Reuters) - This has not been the summer many oil traders had expected after last year's bumper profits.
Banking on more of the same, the world's refineries have churned out more diesel, gasoline and jet fuel than eager drivers and holiday makers have been able to consume even over the summer travel season.
Fuel inventories in the United States, Europe and Asia are brimming despite the height of peak summer driving. European traders are now moving to store diesel on tankers at sea as on shore storage tests its limits yet again.
At least one vessel, the 90,000 tonne STI Grace has dropped anchor off the chic holiday town of Southwold on England's east coast in what traders said was floating storage. The vessel was chartered by Glencore (LON:GLEN). The Baar, Switzerland-based commodities trader did not immediately reply to a request for comment.
Several other trading houses including Vitol, CCI Rolympus and Hartree have enquired about floating storage in recent days, according to ship brokers.
The resurgence of floating storage, full tanks on land and the wilting demand growth underscore the difficulty crude oil will face to find any sustained price recovery in the near term, even as crude production itself tapers off.
"Global oil stocks refuse to come lower," said Tamas Varga, analyst with PVM Oil Associates.
Some market analysts had focused on drops in U.S. crude inventories, and expected declines in oil production there, as a sign that the market had begun rebalancing, he said. "It is the product stocks that should prevent any (crude oil) price recovery."
DOG DAYS COME EARLY
Benchmark diesel futures (LGOc1) are trading in a contango until November 2017. This structure, when prices in the future are above those a seller could get now, makes storing profitable.
But with land storage nearly full, a deep prompt contango of over $7 (£5.2) a tonne and low freight rates, storing diesel on tankers is profitable in some cases, according to traders and shipping brokers.
Gasoline traders are also locking in expected profits for next year, and in a rare move are stashing summer-grade gasoline in tanks until next year.
U.S. gasoline futures, an indicator of the state of the global market, are in a sustained contango for the first July in eight years, Varga said, highlighting the excess of product available now at exactly at the time of year when it is usually in the highest demand.
It is a remarkable development, due in part to a stock build that has squashed profit margins for refineries that have over the past two years of low oil prices benefited from a sharp rise in global oil demand.
But over production coupled with slower-than-expected demand growth are now taking their toll.
Many refineries shifted their production yield in recent weeks from gasoline to distillates, such as diesel and jet fuel, but only a sustained reduction of refining rates will likely change the picture, said Robert Campbell, head of oil products markets at consultancy Energy Aspects.
"If not, a massive inventory hangover will bedevil the market for months to come," Campbell said.