By Dinakar Sethuraman Feb. 18 (Bloomberg) -- Traders are choosing to store oil products in floating tankers instead of crude oil as freezing temperatures and rising demand boost the need for distillates, Poten & Partners said in a report. Crude oil stored in tankers fell to about 25 million barrels currently from levels exceeding 80 million barrels last year, Poten said in a report to clients last week. Floating storage for clean products such as gasoline and gasoil reached a peak in December at 80 million barrels in 127 vessels. That’s down to 57 million barrels currently, it said. “In the early part of 2009, crude oil tankers were the bearers of most of the storage activity but as the year continued, clean product tankers made a significant emergence into such employment,” Poten said. Floating storage employs tankers that would otherwise be used to deliver cargoes. Traders hired the vessels because the price for oil was higher later in the year, meaning it was profitable to store for delayed deliveries. In January, freezing temperatures across North America, Europe and Asia increased distillate demand. “Colder weather conditions gripped the Northern Hemisphere and gave a boost to Atlantic product tanker demand,” SSY Consultancy & Research Ltd. said in a report on Feb. 16. “Higher freight and a narrowing gasoil contango, from a weather-driven price spike, eroded clean storage economics.” Contango Market “Although the spread between spot and future prices for distillate has narrowed significantly, opportunities will likely persist for traders and shipowners interested in storage plays,” Poten said. Releasing the product from floating storage into a “fairly” saturated market would further deepen the contango, a term used when future prices are higher than current levels, as the Northern Hemisphere heads into warmer weather, Poten said. The amount of crude oil held in storage on tankers fell 25 percent in a week, Morgan Stanley said in a report dated Feb. 7. Demand for distillates and transportation fuels has to recover “materially” to change the price curve to backwardation, when prices of commodities for delivery in the near future are higher than those made later. Iran, OPEC’s second-largest crude producer, has at least three supertankers idling in the Persian Gulf, according to data from ships collected by AIS Live Ltd. --With reporting by Alaric Nightingale in London. Editors: Jane Lee, John Chacko. To contact the reporter on this story: Dinakar Sethuraman in Singapore at +65-6212-1590 or dinakar@bloomberg.net. To contact the editor responsible for this story: Clyde Russell at +65-6311-2423 or crussell7@bloomberg.net.

Source