Tank farms on land and storage facilities at oil refineries are brimming. Commercial stocks of crude oil and refined products, such as gasoline and diesel, around the OECD hit a near-record 2.745 billion barrels at the end of Q1 2009, according to the International Energy Agency (IEA).
Inventories are fast approaching the previous peak of 2.8 billion barrels, set in 1998, and are equivalent to 62 days of OECD forward consumption at present rates, a high since 1992.
* As tank farms on land fill up and ships lie idle as a result of the recession, a growing number of vessels are being pressed into service as “floating storage”. Analyst estimates suggest another 100-120 million barrels of crude is being stored on vessels moored in the Persian Gulf, off the coast of Singapore, and at other locations around the world.
For floating storage factbox, click on [ID:nLE890948].
* Satellite tracking systems reveal a huge fleet of more than 100 vessels moored outside Singapore harbour, most full of surplus oil and products (http://www.vesseltracker.com/en/Port/singaporeport/Map.html). Smaller tanker parks have formed in other parts of the world.
* Warehouses registered with the London Metal Exchange (LME) are storing a record 3.9 million tonnes of primary aluminium (more than 50 percent higher than the previous peak in 1994 after the fall of the Soviet Union), as well as another 1.1 million tonnes of other non-ferrous metals, including copper, nickel and zinc.
Much of the capacity is owned by port authorities or oil refiners, but leased to specialist warehouse operators, investment banks and trading companies who take the commercial risk of finding raw materials to fill it with. Rents for the use of storage facilities are high, especially when as now the capacity is nearly full.
Storage is a deeply counter-cyclical business, most profitable during downturns, but lean in the good times. It provides a perfect form of diversification; many companies use it to help balance cyclical profits from other physical trading and brokerage activities.
But the massive overhang of raw materials contrasts with the run down in stocks of manufactured items as producers have slashed production.
Even if a recovery begins in H2 2009 and into H1 2010, driven by the need to stabilise and rebuild inventories along the manufacturing supply chain, it could take six months or more to filter through to the raw materials sector, where the much higher stock levels will take longer to work down.
In the meantime, most investors would make more money from owning a tank farm or a warehouse rather than the commodities themselves.