In the murky world oil market, one of the most reliable gauges of supply and demand is what is happening with oil inventories and arbitrage.

Over the past two months or so, world oil inventories have risen sharply – and counter-seasonally – as benchmark prices in Europe and the Middle East have slumped by about 17 per cent from their summer peaks. Oil prices for near-term delivery have fallen more sharply than for delivery further in the future, leaving the market in so-called contango – that is, where prices slope upward over time.

When there was last a strong contango, in 2008-09, speculators profited by buying oil in the spot market, parking it in floating oil tankers – much of it in the Caribbean at that time – then selling the crude oil in the futures market for a profit. As long as the near prices and tanker rental (and other carry costs) were cheap enough, and the futures prices high enough, the arbitrage continued.

There has been much speculation recently that the pattern is repeating, although not everyone is convinced. The International Energy Agency in its monthly oil market report last week was sceptical, concluding that “Inventory data for August and tanker tracking data do not support the idea that floating storage has significantly increased, and anecdotal reports suggest that market participants have put their extra cargoes into land-based storage. With the price spread between first‐ and second‐month Brent prices on the ICE futures market remaining at about $0.80 [per barrel] over July and August, it appears that the economics support land-based storage but not floating storage, which normally requires a sustained contango of at least $1 [per barrel] to cover the higher costs involved, such as freight, insurance and bunker fuel.”

Why does this distinction matter? If there was a big build-up in sea-based storage it would suggest that speculators expect the market to pick up significantly in the near future – in 2009, for example, oil prices more than doubled during the year. A build-up in land-based storage, on the other hand, more likely indicates that oil companies just cannot find buyers.

The IEA report concluded: “During August, a number of West African, Middle Eastern and North Sea crude cargoes were bought by traders and initially thought to be destined for floating storage, although it now appears that these were shipped to the Saldanha Bay terminal near Durban, South Africa which offers easy export routes into Asian and Atlantic Basin markets.”

One of the clearest trends in the past few years is the sharp decline in oil imports by the United States, which have fallen from a peak in 2005 around 12 million barrels per day (bpd) to about 7.5 million bpd as demand remained flat amid rising domestic production. US imports from the Middle East in that period have been relatively steady, but those from West Africa have fallen sharply and instead have been diverted into an already well-supplied Asian market.

The US government’s energy information agency last week said, “In the United States, Europe, Japan, and other mature industrialised economies, liquid fuel demand has levelled off and is projected to slowly decline…The largest potential for growth in demand for liquid fuels lies in the emerging economies of China, India and countries in the Middle East.”

A mild winter in the northern hemisphere and failure to spur growth in emerging markets will mean those oil storage tanks will stay brimming.