Increasing number of oil refineries have started to destroy stockpiles of sulfur-rich fuel that powers the merchant fleet in anticipation of a demand collapse in fewer than 18 months.
The stockpiles of fuel are facing the slump in the U.S. and Singapore and traders directly involved in buying and selling the fuel say some oil refineries already started to trim output in anticipation of rules that will severely restrict consumption from Jan. 1, 2020.
First reason: Cutting back on fuel
As the oil market is facing a huge shift, refineries are planning to cut back on output before demand collapses at the start of 2020, but if they do so faster than consumption slides, then fuel-price volatility could increase. The market is currently trading in what’s known as backwardation, where immediate prices are higher than later ones — a structure that can punish traders who store.
Nevyn Nah, a Singapore-based analyst at Energy Aspects, said of diminishing stockpiles: “It’s literally the perfect storm and any fuel oil blender whose lease / storage lease is going to expire now will not be renewing it because of the backwardation”.
The oil market traditionally gauges the strength of different fuels based on where they’re trading relative to crude. Ship fuel, or bunker as it’s known, is normally at a discount because it’s a residue after turning crude into more valuable products like gasoline and diesel.
Cracking Discount
In Europe, that discount, or crack, strengthened to $7.17 a barrel less than Brent crude, on July 31 from minus $14.30 in April, according to fair-value data compiled by Bloomberg. The price in January 2020 is at about a $24 discount.
The rule change, announced in October 2016 by the International Maritime Organization, will limit the sulfur content of bunker fuels to 0.5 percent starting Jan. 1, 2020, unless vessels have installed scrubbing equipment. The current limit in most parts of the world is 3.5 percent. The pollutant is blamed for human health conditions like asthma.
Second reason: Failure to meet specs
The traders based in Singapore say that an alternate reason for diminished stockpiles there is because some fuels don’t meet the necessary specification.
In the U.S., they are at 28.7 million, the lowest for the time of year in at least three decades, Energy Information Administration data show. Bunker-fuel inventories in Singapore, a major global refueling hub for shipping, have dropped to a nine-year low of 14.8 million barrels, according to International Enterprise Singapore.
Third reason: Reduced prices
According to traders, the backwardation in prices is also hitting a regular fuel oil arbitrage trade to Singapore from Europe. Relatively few very large crude carriers, or VLCCs, plowed the route around South Africa’s Cape of Good Hope since March.
Mr.Nah concluded, “The backwardated price structure means traders favor making cargo deliveries as quickly as possible, which means using Egypt’s Suez Canal. However, the industry’s biggest ships can’t navigate the waterway fully laden, so smaller carriers are being used and they’re dropping off supplies in the Middle East instead”.
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Source: Bloomberg Quint
