Oil stored in ships has been piling up off key Asian ports as a crackdown in China on private crude oil processors has blunted purchases and disrupted flows, including some United States-sanctioned barrels from Iran.
Vessels off Singapore, Malaysia and China had about 62 million barrels last week after hitting a near three-month high earlier this month, according to intelligence firm Kpler.
Venezuelan oil and Iran's heavier grade - commonly imported as bitumen mixture - are among the varieties held, Kpler said.
"These barrels sitting off South-east Asia are distressed," said Mr Anoop Singh, Singapore-based head of East of Suez tanker research at Braemar ACM Shipbroking. "They're going to have a tough time finding homes other than China, unless the situation surrounding the US sanctions changes dramatically, or China's clampdown on its independents is eased."
China, the world's biggest crude importer, has been probing private refiners to bolster compliance with tax obligations and environmental rules.
The investigations have seen import quotas cut at a time when global crude markets have been roiled by the spread of the Delta coronavirus variant and prospects for reduced monetary stimulus.
That has seen global benchmark Brent drop after rising towards US$80 as recently as last month.
Oil futures in New York traded near US$66 a barrel after surging for the first time in eight sessions on Monday, snapping the worst losing streak since October 2019.
Ordinarily, supplies would build up offshore only when the market is in contango, a bearish structure that encourages traders to lock in higher future prices and hoard oil for later sales.
As part of the prolonged clampdown, China introduced a consumption tax from June on imports of three oil-related items, including bitumen mixture, citing pollution concerns. That has contributed to the pile-up off Asian ports as the tar-like substance used to produce road-making material was often used as a cover to mask actual flows of Iranian and Venezuelan oil into Asia.
With the new levy boosting the price of bitumen mix imports, the volume into China shrank by about 80 per cent last month from the peak in May, according to Mr Janus Juay, a crude oil analyst at Kpler.
"The main destination for sanctioned cargoes is China most of the time," he added.
In the floating holdings in the region, Kpler identified millions of barrels of Iranian crude and condensate, as well as oil that had undergone ship-to-ship transfers off Malaysia, a practice that can obscure a cargo's origin. Venezuelan Merey crude oil was also held.
Kpler defines floating-storage vessels as ships that have been idle or moving at a slow speed for at least seven days.
There may have also been a knock-on effect around China's ports as some cargoes from other destinations were held up.
A total of 29 oil-laden tankers were floating off China, according to analytics company Vortexa. While one-fifth were believed to be carrying Iranian and Venezuelan crude, others were laden with oil from Abu Dhabi and Brazil amid delays to discharging due to a lack of storage space, said Ms Emma Li, a Singapore-based analyst at Vortexa. The company defines floating storage as ships stationary for at least seven days.
As part of the clampdown, the Chinese authorities have cut import quotas allotted to the independents. Last month, flows of crude into China fell to the lowest since May. In addition, China's oil refining tumbled to the slowest pace in 14 months last month.