Global marine fuel 0.5% prices are expected to be capped by increasing supply and depressed demand from the retail sector in September as refiners continue to grapple with weak low sulfur fuel oil margins.
Inventory levels in Asia in particular are expected to rise as an arbitrage window from the West that opened in early-August has market participants expecting at least a 500,000 mt increase in volumes landing in Singapore in September from the month before.
Weak demand and ample supply were weighing on fundamentals in Europe at the start of September as fears of a second wave of the coronavirus pandemic dampened macroeconomic prospects.
“August was quiet, the market is still pretty weak,” one European source said, adding the seasonal summer lull had exacerbated the weakness.
Bunkering demand has remained depressed since the outbreak of the pandemic, but there has been a slight recovery in recent weeks amid a base level of demand in the container segment and varying requirements for oil product storage. However, fears of a second wave of infections may blunt this flicker of hope in an already well-supplied market.
Storage economics weakened significantly in August compared with April and May, during the major demand fallout from the pandemic.
The contango between front and second month 0.5%S FOB Rotterdam barge swaps was assessed Aug. 28 at minus $1.50/mt. The average contango structure seen through August was minus $3.53/mt, compared with minus $11.34/mt in April and minus $9.36/mt in May, which allowed traders to store and roll oil forward amid a lack of incremental demand.
With coronavirus cases rising in Europe, uncertainty remains as to when demand will recover to tackle the supply length.
Marine fuel prices in the US began September at the highest level since March, effectively reaching levels not seen since the pandemic began severely impacting US markets.
Market sources had talked of tightness in the US Gulf Coast marine fuel market prior to Hurricane Laura. Brent cracks topped $6/b at end August and began September at $6.77/b after being rangebound in recent months. The last time the crack was higher was March 31 at $7.17/b.
The strength came as Hurricane Laura threatened the USGC refining complex in the last week of August, leading to more than 2.3 million b/d of refining capacity being taken offline in Texas and Louisiana. Some refiners are still assessing the damage, and some like ExxonMobil’s 269,024 b/d Beaumont plant are still without power.
Tightness in the local market led to an increase in imports, according to data intelligence company Kpler. The USGC saw little importing of 0.5%S or 0.5%S-related components between March and May, relying instead on stockpiles built up in February.
The 0.5%S swaps market flipped from a slim contango between the first and second months to a backwardation as wide as 65 cents/b toward end August as the market tightened and cracks strengthened.
While cracks remain strong into September, the forward curve shows the market returning to close to flat and flipping back to contango by year end.
The Asian LSFO market had erased gains by end August from the first half of the month as bearish supply and demand factors weighed on margins as trading picked up for H2 September loading.
Trader estimates of an almost 500,000 mt increase in LSFO arbitrage volumes arriving in Singapore in September saw the Asian LSFO crack spread narrow to $7.06/b Aug. 31 from $8.54/b Aug. 18. This diminished the likelihood of some LSFO producers in South Korea, Thailand and India raising production. The number of spot cargoes offered is expected to be less than three from India and East Asia in September, down from 7-8 cargoes/month in Q1.
Traders estimate the volume of LSFO arriving in Singapore in September at 2.5 million-3 million mt, up from 2 million-2.5 million mt estimated for August. The expectation of rising supply saw the Singapore Marine Fuel 0.5% to Singapore 380 CST high sulfur fuel oil spread hit a three-month low at $55.36/mt Aug. 28.
Singapore bunker suppliers have reported fewer inquiries for MF 0.5% bunker fuel in recent days than in H1 August, further tempering sales estimates for the month.