- For Q3 reports, the high sulfur fuel oil market was relatively strong overcoming slack buying demand from Asia.
- Singapore focused on running down existing HSFO inventories in preparation for the IMO’s 0.5% sulfur cap starting in 2020 lead to a surge in European stocks.
- LSFO demand ballooned towards the end of the second quarter pushing up the Northwest European fuel oil hilo between 1% FOB NWE cargoes and 3.5% FOB Rotterdam barges.
- Scandinavian refiners allocate 1% spot cargoes to the 0.5% blend pool that sees high demand for 1% fuel oil to produce air-conditioning in the summer months.
- As the quarter drew to a close, domestic prices started falling, losing their premiums to the export market, which could boost exports in Q3.
According to an article published in Platts, the high sulfur fuel oil market was relatively strong through the second quarter, with a generally tightening European market often overcoming slack buying demand from Asia.
Singapore focussed on HSFO inventories
Singapore was focused on running down existing HSFO inventories in preparation for the International Maritime Organization’s 0.5% sulfur cap starting in 2020. As such, arbitrage economics to the east were unattractive during the period and this led to a buildup in European stocks, with few outlets early in the quarter.
Limited storage availability for HSFO
Despite this, a combination of the refinery maintenance season in Russia, a move to storing 0.5% marine fuel components which have limited storage availability for HSFO, and the approaching peak Saudi Arabian summer air-conditioning demand boost supported values towards the end of the quarter, and the double-digit backwardation on the 3.5% FOB Rotterdam barge curve could persist through the summer as a result.
Countries feel the pinch
Most recently, barge loading delays at Rotterdam — with a reduced number of loading locations for high sulfur bunkers creating a backlog at the terminals — also created a tightness on the prompt for 380 CST RMG grade bunker fuel.
Despite a heavily negative 3.5% Med/North spread, the Mediterranean has also felt a pinch this summer from refinery outages and a switch to bitumen production from Turkey’s Tupras. Additionally, following its imposition of sanctions on Venezuela, the US has pulled extra cargoes of HSSR from the Mediterranean, taking components out of the blending pool for RMG and tightening the local market.
In July, HSFO arbitrage economics to the east are expected to improve as inventories have been depleted in Singapore, with low arrivals through June. A short flurry of fixture activity is expected in the summer months to cover the final batch of high sulfur bunker demand, ahead of the shift to 0.5% compliant fuel. From October, the high sulfur arbitrage fixture list is expected to be dry.
HILO spread surges as LSFO demand surges
Low sulfur fuel oil demand ballooned towards the end of the second quarter on strong demand for low sulfur blending components in Europe and Singapore. As a result, the Mediterranean utility market began to compete for low sulfur streams, pushing up the Northwest European fuel oil hilo — the spread between 1% FOB NWE cargoes and 3.5% FOB Rotterdam barges — to the highest levels seen since July 2014.
The hilo is not expected to soften going forward as demand for 0.5% marine fuel only continues to build ahead of 2020, and more 1% fuel oil allocation gets diverted to the blending pool.
High demand for 1% fuel oil due to hot summer
In addition, many Scandinavian refiners have begun allocating their 1% spot cargoes to the 0.5% blend pool, capping the output of available 1% cargoes for the Mediterranean utility market, which typically sees high demand for 1% fuel oil to produce air-conditioning in the summer months.
Six months ahead of the impending 0.5% sulfur regulations, demand for 0.5% marine fuel is still relatively low, but testing and production of the new fuels have increased.
Purchases of physical 0.5% marine fuel are being conducted against 1% FOB NWE cargoes and 1% FOB Mediterranean cargoes. The market identified the second half of the year as the beginning of the major shift towards a low sulfur future, with many companies saying IMO 2020 effectively starts on October 1, 2019, not January 1, 2020.
LSSR sees early 2020 dividends
European straight-run fuel oil demand has dominated the feedstocks complex in the second quarter, with a bullish outlook expected to hold through 2020 and beyond. This upturn was supported by storage incentives for the feedstock ahead of IMO 2020.
The reduction in sulfur in bunker fuel to 0.5% as of January 1, from 3.5%, is likely to boost the value of a range of blend components with low sulfur content, including LSSR and low sulfur vacuum gasoil.
Storage for LSSR has been taking place in Scandinavia, Malta, and Singapore, with traders adding that it is happening “everywhere.”
Surge in differentials
The VGO market saw a surge in differentials this quarter due to a confluence of factors, including maintenance at Tuapse’s refinery, the loss of Antipinsky and Afipsky barrels, and the Druzhba pipeline contamination issue, which tightened availability.
However, differentials were expected to drop from fresh highs as Urals crude issues ease, and with the expectation that Antipinsky will resume VGO exports in mid-July, according to feedstocks traders.
The market should see the usual uptick in European VGO demand from the US summer driving season in Q3, which will keep VGO premiums buoyant. This will further support arbitrage economics between Europe and the US.
Bunker market gears up for 2020
Demand for bunker fuels is likely to undergo a progressive shift in the third and fourth quarters away from HSFO to new 0.5% sulfur fuels as the IMO’s lower sulfur cap approaches.
As part of this shift towards lower sulfur fuels and the associated logistical changes to oil storage, long wait times to load HSFO from the terminals in the Dutch port of Rotterdam are likely to continue throughout much of this year.
VOPAK commenced maintenance at its Rotterdam storage facility at the start of the year as an initiative to invest in its oil hub terminals in preparation for the IMO 2020 bunker fuel regulations, the company said in a report earlier this year.
Sources said that Mediterranean bunker markets are likely to experience balanced market conditions for the new, lower sulfur fuels in the west, although the east of the region is likely to experience some tightness.
Most ships in the eastern part of the region will continue to run on HSFO in the short term and this will see increased supply from Russian refineries ending maintenance although, with the raised output from Russia set to coincide with the peak Saudi demand season, concerns about tightness have lingered.
Russian river navigation begins, bunker demand picks up
The Russian river navigation season started on time, at the beginning of April, with most river basins opening for shipments of goods — including fuel oil and VGO — by the end of the quarter, following a relatively mild winter.
But despite the early start, exports in April were lower compared with domestic deliveries, with the uptick of bunker demand at the ports providing an attractive outlet for fuel oil.
A premium on domestic prices
This trend was further boosted by the premiums that domestic prices retained over the export netbacks throughout the quarter, thus making the domestic market more attractive than export destinations.
However, the premiums remained fairly modest as, unlike last year, when fuel oil was getting support from the early start of the bitumen season due to ramp up construction in the run-up to the football World Cup, this year the bitumen season has been less active.
Typically around 10% of Russia’s 50 million mt/year fuel oil production switches to bitumen annually. But the switch almost entirely falls in the summer months, when close to two-thirds of the fuel oil capacity is affected. As a result, the lower output props up domestic prices at a time when there is no heating demand.
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Source: Platts
