The huge volumes of oil held at sea have started to shrink and are expected to continue declining into the second half of this year, thanks to recovering demand and a change in the oil market structure, shipping sources told Reuters on Wednesday.

According to data from IHS Markit, cited by Reuters, crude oil in floating storage dropped to below 150 million barrels by the end of June, from as high as 180 million barrels in April, when global oil demand crashed by 30 million barrels per day (bpd). The volume of refined oil products held at sea also dropped—to 50 million barrels, from a peak of nearly 75 million barrels in the middle of May, IHS Markit told Reuters.

According to estimates from the International Energy Agency (IEA), floating storage of crude oil dropped in May by 6.4 million barrels to 165.8 million barrels, from its all-time high of 172.2 million barrels in April. 

Estimates by Bloomberg showed earlier in June that floating storage of North Sea oil had started to shrink as most of Europe lifted their lockdowns. 

Apart from oil demand rising from the depressed levels in April, the market structure of oil prices has changed in recent weeks, making storing oil at sea – the most profitable play in oil in April – no longer financially viable. 

From a super contango in April, the Brent Crude futures curve has flattened and flipped to backwardation for the nearest months, wiping out the most significant financial incentive for oil trading houses to profit from the price structure when oil demand crashes. In the super contango, front-month prices were much lower than prices in future months, pointing to a crude oil oversupply and making storing oil for future sales profitable.  

In the middle of June, production cuts and an uptick in oil demand helped the Brent Crude price structure flip to backwardation, signaling a tightening of the physical oil market. 

Backwardation – the opposite of contango – is the market situation that typically occurs at times of market deficit. In backwardation, prices for front-month contracts are higher than the ones further out in time.