The 20 million barrels of floating oil that could calm the market

Tiny Gabon has been among the places that have roiled oil markets this week. Workers in this west African country settled a four-day strike yesterday, but not before helping to send the widely traded U.K.-traded crude benchmark above $120 a barrel for the first time in almost three years. It involved just 240,000 barrels a day of production, but demonstrated the market’s jitteriness since Libya’s 1.1 million barrels a day of export oil was lost. There is a crisis premium of $15-$20 a barrel in the price of oil, most analysts agree, and probably more.

Yet all this time, between 20 million barrels and 36 million barrels of surplus oil have been anchored in floating storage (ships such as the tanker pictured above) in the Persian Gulf and the Mediterranean Sea, reports Thomas Strouse. This bounty belongs to Iran, which is the object of a U.S.-imposed sanctions regime that among other things seeks to stop its flow of crude oil revenue. If this oil were freely sold, it — along with Saudi Arabia’s increased exports — would easily compensate for the lost Libyan cargoes for almost a month.

But there is evidence that some of it is being sold onto the market. According to data compiled by Reuters, the surplus oil is contained in a dozen very large crude carriers (VLCCs), which can hold about 2 million barrels of oil each, plus 12 million barrels more in shorter-term storage. Yet that was a smaller fleet of storage than Iran had last year, when up to 25 tankers, mostly VLCCs, were at anchor, the agency reports. So clearly there have been buyers. Read on to the jump.

It’s hard to tell who is buying it. Officially speaking, China, India and Japan — Iran’s largest oil customers — last year reduced their purchases. One customer could be Italy. Last year, Italy bought about 208,000 barrels a day of Iranian oil, an 80 percent increase from 2009, Strouse reports, and that volume could be higher now that its biggest supplier — Libya — is all-but unable to export its crude.

The trick is how to pay Iran, but as Reuters points out, "no sanctions … are water-tight." Until recently, a German bank called Europäisch-Iranische Handelsbank had been handling India’s purchases of Iranian crude. But U.N. sanctions against South Africa in the 1970s showed that oil traders can be wily. Shipments can be registered from one destination — such as Iran — then shift in mid-ocean. Cash can be used. Or it can be strategically apportioned out as oil prices rise and fall, which is probably what Iran is doing.