A new glut of oil and gas is emerging, floating at sea, as the coronavirus epidemic cuts China’s appetite for fuel and hampers work at Chinese ports. Dozens of ships are acting as floating storage vats for oil and liquefied natural gas because the owners of the fuel are unable to find buyers or places to store their cargo on land, according to The Wall Street Journal (March 4, 2020). Some 79 vessels are now storing crude oil at sea.

In the past decade traders often loaded up ships with crude oil or gas with no immediate intention of moving the cargo around the world, seeking to profit by buying fuel on the cheap and locking in a higher price in the future. Such hedging made supertankers a modern version of an inventory warehouse. But the current situation is different for the 87 million barrels of crude stored on the high seas today. Rather than getting paid to store oil and gas in ships, many traders simply can’t find a home for their cargo. So storing oil at sea comes with costs for traders and owners.

A similar story is unfolding in the gas market: Eleven ships are currently storing LNG at sea.  Traders typically load up ships in the fall to take advantage of rising demand and higher gas prices when temperatures drop in December. Stored at minus-261 degrees, some LNG evaporates while at sea, which means owners are loath to store gas in vessels unless they can profit from it. “Everything that’s floating is probably distressed,” said an industry expert. “It’s something that’s trying to find a home. It’s floating until it can find storage.”

This post provided courtesy of Jay and Barry’s OM Blog at www.heizerrenderom.wordpress.com. Professors Jay Heizer and Barry Render are authors of Operations Management , the world’s top selling textbook in its field, published by Pearson.