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The UK has become the temporary centre of the as a lull in demand from refineries has led traders to store crude on ships off the nation’s coast.

As much as 14m barrels of North Sea crude — the equivalent of more than two weeks of UK production — have been parked in giant supertankers off Southwold, the Firth of Forth and Cornwall in recent weeks.

While stocks of crude oil have largely been declining elsewhere in the world the flotilla of floating storage vessels off the UK illustrates how the process of bringing oil supply and demand back into balance will be far from smooth, with pockets of regional weakness emerging.

Since hitting a high for the year above $50 a barrel in June crude prices have , slipping towards $40 a barrel and putting more pressure on oil companies and Opec producers that hoped the worst of the two-year old price crash was over.

Most of the oil is onboard tankers that have recently lifted North Sea crude, according to satellite ship tracking information and trading sources. The grades of crude they are carrying all help physically underpin the Brent futures contract, the world’s oil benchmark.

One supertanker, the Maran Thetis, picked up a cargo of crude at the UK’s Hound Point terminal in the Firth of Forth this week, the main loading point for Forties — the biggest single grade of the physical cargoes that can be delivered through Brent futures.

But instead of sailing to an oil refinery the Very Large Crude Carrier (VLCC), which carries at least 2m barrels of oil, has been parked about two kilometres offshore from the famous Muirfield golf course in East Lothian, which has hosted the Open Championship.

Another fully loaded VLCC, the Gener8 Ulysses, is about 20 miles east in the North Sea where it has circled for the past week.

Further south, a small flotilla of oil tankers, including at least two VLCCs, have dropped anchor ten miles off the Suffolk seaside town of Southwold. They are sitting in one of the few offshore berths in the North Sea where they are allowed to transfer oil from one tanker to another.

Traders said the oil was being stored for a variety of reasons, but most link back to signs that the market .

Refineries in Europe have been slowing production after turning too much cheap crude into gasoline and diesel earlier this year, essentially spreading the crude glut into the refined product market.

“We are facing more run cuts in Europe as products are oversupplied,” one senior trader said.

In Asia, refiners have started using more oil stored locally, pulling crude out of onshore and offshore storage according to analysts. That has reduced the profitability of sending oil all the way from the North Sea.

Others say a drop in chartering rates for VLCCs has made it profitable to store the oil on ships in Northwest Europe, at least in the short term.

The situation has not been replicated globally. Total volumes of oil stored at sea have been coming down, according to London-based consultancy Energy Aspects and shipping data.

Day rates for hiring VLCCs have slumped since the first quarter as demand has slowed and as more new tankers are expected to enter the global fleet.

“We have lots of ships coming to market just as demand growth is slowing,” said Stavroula Betsakou, head of tanker research at Howe Robinson Partners.

A market conditon known as contango, where prices for future delivery are higher than spot prices due to the oversupply, allows traders to make a profit if they are able to store the crude at sea cheaply enough.

Most of the trades are expected to unwind over the next two months, industry sources said. The trading arm’s of Shell and Total have chartered at least two of the VLCCs off the coast of the UK, they said.

In the English Channel, the Sara VLCC has been at anchor off Falmouth in Cornwall for the past week. It is listed as ‘for orders’ meaning it may be looking for a buyer. At the opposite end of the country, 15 miles south of John O’Groats, the Alfa Britannia Aframax tanker is sitting with about 700,000 barrels of crude by Wick.

Oil traders tend to guard information about their operations closely fearing they will give rivals an advantage. Some in the industry are also sensitive about the public perception of floating storage, fearing it will be misconstrued as hoarding oil or an attempt to boost the price.

In 2009, the last time floating storage was a major feature of the oil market after demand collapsed during the financial crisis, the Daily Mail newspaper decried the practice as the work of .

The major US crude oil benchmark has fallen into a bear market, heaping more pressure on oil companies and major producing countries that had hoped the worst of the rout was over.

West Texas Intermediate, the main US crude benchmark, fell to $41.14 on late Thursday afternoon, down 20.4 per cent from its intraday peak of $51.67 per barrel on June 9. A 20 per cent decline is the technical definition of a bear market.

Oil prices are still comfortably above the nadir touched at the start of the year and Brent crude, the North Sea benchmark that is the most used international measure, is still hovering just over bear market territory. However, the renewed decline is a worrisome development for energy groups and states that depend on oil revenues.

Here are five things traders are tracking to see if the slide continues — or if the sell-off is just a blip in a recovery.

Supply and demand

Two years since oil began its precipitous decline from above $100 a barrel, reaching a trough below $30 in January, the market appears to be edging closer towards balance.

High-cost supplies are declining, demand has been boosted, and concern about the impact of investment cuts on future supplies have all helped the market recover from levels that threatened bankruptcy and caused economic pain across the sector.

But the process of moving back to a balanced market was never going to be smooth. This summer has disappointed the more bullish analysts as the two-year-old glut of crude has become a glut in products — the gasoline, diesel and jet fuel that consumers use.

Refiners ran hard to meet forecasts of surging demand but may have over-egged just how much fuel was needed. Stocks of both crude and products that have will need to be worked off before there can be a more sustained recovery.

Gasoline

The recent decline in oil prices has several drivers but one stands out: gasoline demand has underwhelmed and .

In the US — the world’s most important gasoline market, accounting for almost one in every nine barrels of oil globally — a huge surplus is overhanging the market as the summer driving season draws to a close. Stocks are 12 per cent higher than a year ago.

This is putting pressure on prices and refining margins. If it continues, refiners, who had been running hard for much of the past 18 months as low prices buoyed demand, may decide to buy less crude. That, many fear, is delaying the rebalancing of the market.

This new downstream threat has also sharpened attention on demand, which may now not be growing as quickly as many people assumed.

The US Energy Information Administration recently lowered its gasoline demand growth forecast for the remainder of the year to 130,000 barrels per day, or 1.5 per cent, from 220,000 previously.

Others think it is lower still. Veteran oil economist Philip Verleger reckons US gasoline consumption has increased at a rate of just 1.1 per cent this year compared with 2015.

“The fall in gasoline prices will pull crude prices down,” he says. “In the absence of a disruption, do not be surprised to see Brent falling below $40 a barrel, possibly to $37, by mid to late September.”

Floating storage

The persistence of the oil glut has seen some traders storing crude oil and refined fuels such as gasoline and diesel aboard tankers at sea.

They can partially finance the storage by selling the oil forward through the futures market where it currently fetches a higher price thanks to a structure known as that is prevalent when the market is oversupplied (the opposite structure, , sees spot prices rise above future prices during times when supplies are tight).

But while the contango currently covers some of the additional cost of hiring vessels it is not yet wide enough to make it a widespread trade like it was during the financial crisis, when a sudden collapse in demand made floating storage the hottest trade of 2009.

Instead, traders and analysts say it has largely been driven by necessity, with onshore storage already very full or locked up by rival traders in long-term deals. Indeed, outside of a few isolated geographic pockets, floating storage has declined in the past month as global supplies start to recede.

Energy Aspects, a London-based consultancy, calculates that floating storage levels for crude and fuel oil have declined by more than 60m barrels since early June, mostly from oil held on water.

“Stocks are drawing down and oil is coming out of storage, albeit the pace has slowed slightly due to high product stocks,” says Amrita Sen at Energy Aspects.

Rig counts

When Saudi Arabia took its fateful decision in December 2014 not to bolster prices by reducing production it did so with a clear aim in mind — to rebalance the market by driving out higher-cost supplies. That put US shale producers, among others, firmly in the crosshairs.

From that date, oil market participants have closely followed the weekly US rig count survey complied by Baker Hughes to assess the pace of the rebalancing process. Though it is an imperfect measure, the number of rigs drilling is a guide to where US production will go after almost doubling from 5m barrels in 2007 to 9.4m barrels last year.

Since hitting a seven-year low of 316 in May, the number of rigs drilling for oil has crept higher, rising to 371. Last week’s gain of 14 was the biggest increase since December. Since crude oil rose above $50 a barrel in June, drillers have put 55 rigs to work.

If maintained, the increase in drilling activity should stop the decline in US oil production. The US Energy Information Administration now thinks crude production will bottom at 8.1m barrels per day in September before edging up to 8.3m b/d in November and December. Oil majors forecast a similar trend.

“In the US, production continues to slowly decline and we anticipate a further drop in the third quarter,” Bob Dudley, BP chief executive, said on Tuesday. “But with producers slowly adding back rigs, by the year-end.”

Hedge fund positioning

After amassing a near-record bet on the recovery in oil prices between January and May, funds have either started taking profits or .

In early May, hedge funds held the equivalent of almost 420m barrels of Brent through futures and options contracts. Net longs — the difference between bets on higher and lower prices — have since fallen to less than 300m barrels equivalent.

In the US benchmark West Texas Intermediate there has been a similar pattern, with net longs declining by 100m barrels since late April.

“This has been largely driven by a fairly rapid take-up of short positions by the money managers group, which looks reflective of a broader change in sentiment,” say analysts at JBC Energy in Vienna.

“Inputs on the speculative side are certainly more bearish than bullish and crude fundamentals could certainly be used to make a case that there is some more downside to prices yet to be flushed out.”

has renewed its long-term sponsorship of four of Britain’s foremost arts institutions in spite of a campaign of angered over the links between the energy group and cultural organisations.

The British Museum, the National Portrait Gallery, the Royal Opera House and the Royal Shakespeare Company will receive £7.5m over five years from 2018, maintaining a relationship with BP that, for three of them, dates back more than 20 years.

The deal lops 25 per cent off BP’s previous £10m five-year sponsorship, in line with the group-wide cuts it has made to expenditure and staffing following a sharp fall in the oil price in 2014.

Peter Mather, group regional vice-president, said: “Our industry is going through a period of rebalancing, but our commitment to the UK and to our partners is for the long term.” BP’s 27-year in March with the oil company blaming an “extremely challenging business environment”.

The organisations in receipt of BP’s money have been subjected to criticism and hit by regular protests by campaign groups seeking to highlight the company’s impact on the environment and its role in climate change.

In May Greenpeace protesters in the forecourt of the British Museum in protest at its “Sunken Cities” exhibition, forcing it to evacuate all visitors and remain closed for much of the day. Other activists have poured black paint over themselves at the National Portrait Gallery or in the auditorium at the Royal Opera House.

Platform, a campaign group, said BP had bought credibility on the cheap through a renewed partnership with national cultural institutions that equated to funding of just £375,000 a year each.

Anna Galkina, of Platform, said: “BP is ripping off our cultural institutions — their sponsorship provides less than 0.5 per cent of the British Museum’s budget. With this pocket change, BP buys legitimacy.”

Hartwig Fischer, director-general of the British Museum, said BP had brought “great public benefit” through its support for the museum’s activities. “These exhibitions and events . . . have deepened understanding of the world’s many cultures and their interconnectedness,” he said. More than 3.8m people have attended a British Museum exhibition or activity sponsored by BP.

BP declined to give details of the allocation of the £7.5m between the recipients. However, it is thought that the British Museum, National Portrait Gallery and Royal Opera House receive more than the Royal Shakespeare Company, which was first given funding by the company in 2011. Its support since 2013 has underpinned a £5 ticket scheme for 16 to 25-year-olds coming to RSC productions, which it said had allowed it to sell 62,000 tickets to young people.

Catherine Mallyon, RSC executive director, said: “The scheme is highly valued by our audiences and helps us establish lifetime enthusiasts for Shakespeare and live theatre.”

This comes at a time when Indian Oil Corporation, the nation’s largest refiner and fuel retailer, is in the midst of defending its market share.

When the oil price is rising, energy company executives are happy to take the credit for all the clever investment decisions they have made. When it falls, they turn their palms up and blame the commodity markets. This week European oil majors BP, Royal Dutch Shell and Total reported second-quarter earnings to a jaded market. All emphasised cost cutting. One day, this discipline may well deliver a fantastic return for shareholders. If it does not, dividends will have to come down.

Shell on Thursday became the latest to point the finger at weak energy prices to explain surprisingly poor earnings. missed analysts’ modest expectations by half. In the division which actually produces the oil and gas, (upstream) losses of $1.3bn were twice as large as expected, leading to a 4 per cent drop in the shares. The added depreciation charges from its new acquisition, BG Group, compound the effect from lower energy prices.

But Shell’s costs remain too high. While its upstream production costs are over $10 a barrel, notes Société Générale, those of French rival Total are well below that figure. The higher break-even drags on earnings. More important for dividend purposes, it reduces cash flow.

All of the majors struggle to cover their capital expenditures using the cash they generate from operations (before any asset sales), never mind paying for dividends. As a result, BP, Statoil and Total all hinted this month that their will slip further. But Shell looks especially weak. Even if one adds back a $6.4bn increase in working capital, it did not have enough cash flow to cover its capex in the first half of the year.

Granted, one should not read too much into a single quarter or a half. But with , the cash flows that finance payouts are again threatened. Dividends at Shell — the main reason many investors hold the shares — still do not look safe.

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While New Delhi has not shown its full hand in revealing its intentions, the first reports that SPRs might provide 90 days of net import coverage had stoked industry hopes of an important new pillar of oil demand.

Nearly 400,000 UK households left British Gas in the first six months of this year, as the company found its market share being taken by independent energy suppliers.

The energy group lost 399,00 domestic energy supply accounts from January to June, according to its parent company , which announced its half-year results on Thursday.

It blamed those losses on an unusual number of people ending their energy contracts at the same time, adding that it had increased its number of customers in June.

The figures underline the difficulties being faced by some of the UK’s “big six” energy suppliers. Many have seen profits fall in their electricity generation business as the wholesale cost of electricity has dropped, while also being criticised for more quickly.

Claire Osborne, energy analyst at uSwitch, the price comparison service, said: “Energy suppliers big and small continue to eat away at British Gas’s market share. The only way that British Gas can start to win back customers is by launching new, competitive deals.”

In the first half of the year, Centrica suffered falling profits in both its gas exploration and production business, as well as its power generation arm. That, combined with record warm winter weather in North America, meant adjusted operating profit fell 12 per cent from the same time last year to £853m. Once one-off gains were factored in, such as money raised from selling oil and gas assets and its interest in a wind farm, operating profits jumped 31 per cent to £1.8bn.

Its interim dividend rose 0.03p to 3.6p per share.

Shares in Centrica rose 1.5 per cent to 245.6p after the results on Thursday morning.

Amid the wider downturn affecting energy businesses as a result of , Centrica has been trying to cut costs. It said on Thursday it had removed £141m of costs during the first half of the year, and increased its target for the full year to £300m.

Iain Conn, Centrica’s chief executive, said: “The first half of the year has been demanding for Centrica, but the response has been strong and I am encouraged by the progress we have made. We are delivering underlying performance improvement and are building a robust platform for customer-focused growth.”

He added: “I remain confident in our ability to deliver both attractive returns and underlying cash flow growth, as we continue to implement our strategy.”

Profits at fell by 72 per cent fall in the second quarter as continued weakness in oil and gas prices weighed on the Anglo-Dutch group.

The results were much worse than market expectations and will add to the gloom hanging over the industry after weak numbers from and earlier in the week and a in oil prices below $45 per barrel.

Shell’s steep drop in earnings was especially disappointing for investors because it was the first full quarter after completion of its .

Shares in Shell fell 3.1 per cent to £19.80 after the results on Thursday morning.

The addition of BG assets helped lift production by 28 per cent to 3.508m barrels of oil equivalent per day. But this was offset by depreciation charges related to the deal as well as the weak market conditions.

On a current cost of supplies basis – the measure most closely watched by analysts – second quarter earnings were $1.05bn, down from $3.76bn in the same period last year. Analysts’ consensus forecast had been for $2.2bn.

Ben van Beurden, chief executive, said low prices “continue to be a significant challenge across the business,” particularly in upstream production. But he insisted integration of BG was going well, while cost cuts were improving underlying performance.

There was some comfort for shareholders from a quarterly dividend of 47 cents — unchanged from last year. But the financial strain on Shell was evident in the rise in its debt leverage ratio from 12.7 per cent at this time last year to 28.1 per cent now, mainly as a result of the BG acquisition.

Mr van Beurden has committed to a $30bn asset disposal plan to offset the cost of the BG deal but Shell admitted last month that the process because of the pressure from low oil prices on asset prices.

Shell said on Thursday that capital expenditure for the full year would be $29bn, compared with combined investment of $47bn by Shell and BG in 2014 — highlighting the squeeze being placed on the group.

“We are managing the company through the down-cycle by reducing costs, by delivering on lower and more predictable investment levels, executing our asset sales plans and starting up profitable new projects,” said Mr van Beurden.

The consortium of European companies behind Nord Stream 2, the controversial $11bn gas pipeline planned to run between Russia and Germany, has four weeks to resolve Polish objections to the project or risk damaging delays.

Nord Stream 2 — a joint project between Russia’s state-owned gas company Gazprom and private groups Shell, EON, Wintershall, OMV and Engie — would double the capacity of the Baltic Sea pipeline route. But many eastern European countries fear that it will increase reliance on .

UOKiK, the Polish anti-monopoly watchdog, said last week it objected to the project as it would increase Gazprom’s already dominant position in European gas markets. An official at the watchdog told the FT this week that it had given the consortium four weeks to present their arguments for the objections to be dropped.

“The initiative is with them,” said the UOKiK official, who declined to be named as they were not permitted to speak to the media. “So far they didn’t respond directly to our concerns or propose remedies regarding the statement of objections.”

Gazprom needs the Polish regulator’s approval before it can sell shares in the company set up to carry out the project to its five European partners. The pipeline is not planned to go through Poland or Polish waters — but UOKiK has the right to rule on the business impact of the pipeline as some of these companies have assets in Poland, and due to the broad powers of the watchdog under Polish competition law.

A delay in the share sale could in turn hold up the project’s financing, potentially delaying the entire construction schedule. Nord Stream 2 is scheduled to be completed by the end of 2019.

“We are quite tight in terms of the schedule, a couple of months’ delay would be quite detrimental to the overall schedule of the project,” said a person close to Gazprom.

The consortium has already awarded tenders for steel pipes, with the first deliveries due this September. “By autumn we need to be clear about what we are going to do and how we are going to do it,” said the person close to Gazprom.

In a statement, Gazprom said the Polish regulator’s decision influenced only the sale of shares in the project company and that the “Nord Stream 2 project schedule remains unchanged”.

Poland has led a backlash against the pipeline by some eastern EU states, who worry that it is a geopolitical move by Moscow to increase Europe’s reliance on its gas. A number of eastern European countries, as well as the US, also fear that Nord Stream 2 could allow Gazprom to reduce gas supplies , hurting the country’s fragile economy.

Gazprom’s gas-transit contract with Kiev ends in 2019. The Russian state gas company has said it plans to cut down sharply on sending supplies through Ukraine after that, with much of the gas instead going through Nord Stream 2. However, if the project is not completed by the end of 2019 as planned, Gazprom may be forced to negotiate again with Ukraine.

Should the Polish regulator reject the Nord Stream 2 deal, Gazprom could in theory decide to build the pipeline alone — but that would heap a hefty financial burden on the Russian group.

“It [would] make no business sense,” said the person close to Gazprom. The consortium is hoping to reach a compromise with the Polish regulator, they added.

Continuing with the share sales without the Polish regulator’s approval could open up the consortium to fines from Poland. UOKiK declined to comment on its investigation as it is ongoing.

The consortium also needs to apply for environmental clearances from regulators in the five countries whose waters it would pass through: Russia, Finland, Sweden, Denmark and Germany. These clearances are expected to be obtained over the course of next year so that work on the pipeline could begin in 2018.

Since oil prices above $52 a barrel in June they have slipped almost 20 per cent, leaving them on the cusp of a new bear market and heaping more pressure on oil companies and major producing countries that had hoped the worst of the rout was over.

Here are five things traders are tracking to see if the slide continues — or if the sell-off is just a blip in a recovery.

SUPPLY AND DEMAND

Two years since oil began its precipitous decline from above $100 a barrel, troughing below $30 in January, the market does appear to be edging closer towards balance.

High-cost supplies are declining, demand has been boosted, and concerns about the impact of investment cuts on future supplies have all helped the market recover from price levels that threatened bankruptcy and economic pain across the sector.

But the process of moving back to a balanced market was never going to be smooth. This summer has disappointed more bullish analysts as the two-year-old glut of crude has become a glut in products — the gasoline, diesel and jet fuel that consumers use.

Refiners ran hard to meet forecasts of surging demand but may have over-egged just how much fuel was needed. Stocks of both crude and products that have will need to be worked off before there can be a more sustained recovery.

GASOLINE

The recent decline in oil prices has several drivers but one stands out: gasoline demand has disappointed and .

In the US — the world’s most important gasoline market, accounting for almost one in every nine barrels of oil globally — a huge surplus is overhanging the market as the summer driving season draws to a close. Stocks are 12 per cent higher than this time last year.

This is putting pressure on prices and refining margins. If it continues, refiners who had been running hard for much of the past 18-months as low prices buoyed demand may simply decide to buy less crude. That, many fear, is delaying the rebalancing of the market.

This new downstream threat has also focused attention on demand, which may not be growing as quickly as many people assumed.

The US Energy Information Administration recently lowered its gasoline demand growth forecast for the remainder of the year to 130,000 barrels per day, or 1.5 per cent, from 220,000 previously.

Others think it is lower still. Veteran oil economist Philip Verleger reckons US gasoline consumption has increased at a rate of just 1.1 per cent this year compared to 2015.

“The fall in gasoline prices will pull crude prices down,” he says. “In the absence of a disruption, do not be surprised to see Brent falling below $40 a barrel, possibly to $37, by mid to late September.

FLOATING STORAGE

The persistence of the oil glut has seen some traders storing crude oil and refined fuels such as gasoline and diesel aboard tankers at sea.

They can partially finance the storage by selling the oil forward through the futures market where it currently fetches a higher price, thanks to a structure known as that is prevalent when the market is oversupplied (the opposite structure, , sees spot prices rise above future prices during times when supplies are tight).

But while the contango currently covers some of the additional cost of hiring vessels it is not yet wide enough to make it a widespread trade like it was during the financial crisis, when a sudden collapse in demand made floating storage the hottest trade of 2009.

Instead traders and analysts say it has largely been driven by necessity, with onshore storage already very full or locked up by rival traders in long-term deals. Indeed, outside of a few isolated geographic pockets, floating storage has declined in the past month as global supplies start to recede due to lower prices.

Energy Aspects, a London-based consultancy, calculates that floating storage levels for crude and fuel oil have declined by more than 60m barrels since early June, mostly from oil held on water.

“Stocks are drawing down and oil is coming out of storage, albeit the pace has slowed slightly due to high product stocks,” says Amrita Sen at Energy Aspects.

“In 2014 it took seven months for prices to notice the effects of stocks starting to rise. Now it will take a similar amount of time to feel the full effect of the stock draws as so much oil has gone into storage.”

RIG COUNTS

When Saudi Arabia took its fateful decision in December 2014 not to reduce production to bolster prices it did so with a clear aim in mind — to rebalance the market by driving out higher-cost supplies. That put US shale producers, among others, firmly in the crosshairs.

From that date oil market participants have closely followed the weekly US rig count survey complied by Baker Hughes to assess the pace of the rebalancing process. Though it is an imperfect measure, the number of rigs drilling is a guide to where US production will go after rising from 5m barrels in 2007 to 9.4m barrels last year.

Since hitting a seven-year low of 316 in May, the number of rigs drilling for oil has picked up, rising to 371. Last week’s gain of 14 was the biggest increase since December. Since crude oil rose above $50 a barrel in June, drillers have put 55 rigs to work.

If maintained, the increase in drilling activity should stop the decline in US oil production. The US Energy Information Administration now thinks crude production will bottom at 8.1m barrels per day in September before edging up to 8.3m b/d in November and December.

Oil majors forecast a similar trend.

“In the US, production continues to slowly decline and we anticipate a further drop in the third quarter,” Bob Dudley, BP chief executive, said on Tuesday. “But with producers slowly adding back rigs, by the year-end.”

HEDGE FUND POSITIONING

After amassing a near-record bet on the recovery in oil prices between January and May, funds have either started taking profits or .

In early May, hedge funds held the equivalent of almost 420m barrels of Brent through futures and options contracts.

Net longs — the difference between bets on higher and lower prices — have since fallen to less than 300m barrels equivalent.

In US benchmark West Texas Intermediate there has been a similar pattern, with net longs declining by 100m barrels since late April.

“This has been largely driven by a fairly rapid take-up of short positions by the money managers group, which looks reflective of a broader change in sentiment,” say analysts at JBC Energy in Vienna.

“Inputs on the speculative side are certainly more bearish than bullish and crude fundamentals could certainly be used to make a case that there is some more downside to prices yet to be flushed out.”

Beijing is concerned that infrastructure has failed to keep pace with economic development © Dreamstime

The company’s latest report states that Nigeria is set to lead the region in terms of number of planned projects, with 11, followed by 8 in Angola.