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Floating oil product volumes, comprising mostly distillates such as diesel and the heating fuel gas oil, have surged to unprecedented levels of about 100 million barrels, but refiners are still pumping out more than the world can consume.

“We see no quick solution for the floating storage issue. It might run into the third quarter of next year,” said analyst David Wech at JBC Energy, adding, “the high contango reflects the supply-demand imbalance which is most dramatic in distillates.

Banks, oil majors and trading companies with access to cheap credit are looking to reap the benefits of a market structure known as contango, where future prices are higher than the prompt, that tends to emerge in times of oversupply.

They are buying gas oil, storing it on idle tankers in sheltered parts of the English Channel, Singapore and the Mediterranean and selling it at a higher price later.

Buying for storage at sea, dubbed “floating storage demand” by physical traders, creates the illusion of consumption in the products market, and keeps profit margins for distillates positive. This in turn sends a false signal to refiners to keep churning it out.

A senior official at French oil major Total said in an interview with Reuters in November that the market will have to accept high levels of floating storage until at least the middle of next year.

While the contango on crude futures has been volatile and as slender as 3 cents in October, the spread between the front two contracts of the gas oil curve on the IntercontinentalExchange (ICE) has widened since the summer.

Crude oil volumes in floating storage are estimated at around 35 million barrels.

The prompt spread of ICE gas oil futures flipped to contango in November last year from narrow backwardation and has grown steeper.

Last month, the contango was the second highest since the latest sea storage trend began in early 2009 at an average of $10 (U.S.) a tonne.

Trade sources estimate the contango storage play will be profitable until the contango narrows to around $7 a tonne.

“Some guys with deeper pockets are still looking to put more into storage and they can keep doing so until we get to $7 a tonne,” said a London-based distillates trader.

Eventually, deep refinery run cuts to near 80 per cent in Europe and the United States could slow the build of floating storage while further refinery shutdowns and the emergence of real demand could drain them, analysts said.

“It is tough to see an end to this situation. We need to see further shutdowns of refineries,” said Petromatrix analyst Olivier Jakob.

Many refineries in Europe and the United States are already up for sale or idled because of depressed demand since the start of the global economic slowdown.

For some analysts, sea storage at present levels is so high it could meet all of the expected oil demand growth for next year.

“The current stocks afloat should meet most of next year’s demand increase, which would leave onshore stocks basically unchanged from the current record highs,” said Mr. Jakob.