UPDATE 2-Distillates stored at sea jump as demand stays weak

SINGAPORE, July 28 - Diesel and jet fuel stored at sea worldwide have risen by 10 million barrels since June and the total is enough to meet 85 percent of daily global demand, signalling stubbornly poor demand, shipbrokers and traders said.

About 72 million barrels of the middle distillates are stored in tankers, up from around 62 million barrels seen in the middle of last month, as Western markets face uncertain demand as they head for the fourth-quarter winter season, traders said.

Goldman Sachs said the distillates market continued to weigh on global oil benchmarks.

"Although we continue to expect distillate demand to gain increasingly firmer footing as the economy stabilises and industrial destocking shifts to restocking, it is still too early to argue that distillate has comfortably turned the corner," it said in a a research note.

An estimated 47 million barrels of the refined fuel are stored in floating vessels off Europe and the Mediterranean, while nearly 15 million barrels are being stored in Asian waters. The remaining 10 million barrels are stored off West Africa, a Reuters survey of confirmed bookings by traders and shipbrokers show.

"Overall, it would seem as if the market is in a small deficit, and we would expect distillate demand to start to rebound as the global industry destocking ends," Lawrence Eagles of JP Morgan told Reuters.

"However, the overall level of inventories are still worrying, and we believe that the market is far too optimistic in believing it will get to tight inventories at year end."

Giving his own estimates, Eagles said at its peak the volume of distillates in floating storages is more than 80 million barrels.

STILL LUCRATIVE?

Traders said the market's steep contango structure, seen since the first quarter, continued to attract players to arbitrage cargoes from East to West.

Although the contango has since narrowed, with IPE gas oil August/September contract at $6.50 a tonne by 1240 GMT, versus more than $10.00 over a month ago, some players still considered it relatively attractive.

"There's still money to be made but it would take a brave man to risk it now, given that everyone and their brothers are already there and the contango is much narrower," a Singapore-based derivatives trader said.

"It would discourage new players but it would still be attractive for players who are already there to increase their volumes."

Traders said the contango players would lock in their profits by selling the forward-month swaps against their physical cargoes, as the margins are enough to cover the costs of their cargoes, freight and storage.

And they can afford to sell the physical cargoes at a certain amount of loss because they have already made profits on the forward swaps, traders said.

Optimism over an economic recovery has driven crude oil prices towards $70 a barrel in its most sustained rally since hitting record highs in July last year.

But rising volumes of distillates storage globally indicates the world is still consuming less oil than it refines.

Global oil demand for 2009 was pegged at 83.8 million barrels per day (bpd), down 2.9 percent versus last year, the International Energy Agency (IEA) said this month, though it expected demand to rebound 1.7 percent in 2010 as the developed world recovers from recession..

A Reuters poll also showed global oil consumption to rise for the first time in two years in 2010, but the expected 1.1 percent increase is not expected to draw down surplus inventories.

"The crude complex is weak, and the $70 mark is very tenuous... distillates is the biggest pressure point on the complex right now," said Raja Kiwan of PFC Energy.

"Demand is going to be very weak this year... and even with a recovery in 2010 demand will still be below peak levels in 2007."