Jaslyn Ying of global energy and commodity price reporting agency Argus Media on Friday (24 July) published an analysis of the market implications signalled by the recent backwardation of low fuel oil in Singapore:
The Singapore 0.5% sulphur marine fuel oil market has flipped to backwardation on lower arbitrage arrivals and a slowdown in low-sulphur residuals production.
The time spread moved to backwardation on 22 July, with prompt-month August swaps at a $0.25/t premium to September. The backwardation was last at a wide backwardation on 14 February at $1.25/t.
The backwardation materialised amid signs of slowing arbitrage arrivals and a slowdown in regional production of low-sulphur residuals. Refiners during this year’s second quarter were mostly operating below actual refinery capacity to cope with the slowdown in demand for transport fuels because of the impact of the Covid-19 pandemic.
August west of Suez arrivals of low-sulphur residual arrivals to east of Suez are expected to be around 1.8mn-2.3mn t, a fall from estimates in June of around 2.5mn-3mn t, said market participants. The fall in arbitrage arrivals was the result of global reduction in residual exports, with refiners operating below actual capacity on the back of higher crude prices and weaker domestic demand, putting a lid on arbitrage opportunities.
The impact of lower low-sulphur residuals exports east of Suez was felt from refiners in South Korea, Taiwan and even Thailand. Before a fire hit Taiwanese private-sector refiner Formosa Petrochemical’s residual desulphuriser (RDS) on 15 July, the refiner already had plans to export no low-sulphur fuel oil (LSFO) during July and August because of weaker LSFO margins. With the impact of the fire at Formosa’s RDS unit, exports of LSFO might be curbed for even a longer time, traders said.
South Korean refiners like SK Energy and Hyundai Oilbank during the second quarter were producing about 40-50% less than their actual LSFO throughput, in the absence of any firmer demand signals for the bunker fuel.
The reduced LSFO output and lower incoming arbitrage arrivals supported the Singapore 0.5% marine fuel market structure this week.
But market participants are wary of these supply factors sustaining any market firmness. The east of Suez region still has ample offshore and onshore inventories, while the demand recovery in Asia’s bunkering hubs still remains uncertain. Marine fuel sales at Singapore fell to 3.83mn t in June, down by 96,000t from May and 90,900t from a year earlier.
There are close to 30 very large crude carriers (VLCCs) on the water, up from about 25-28 VLCCs in May and June period, according to market estimates. Some of the VLCCs are carrying a combination of high-sulphur and low-sulphur residuals, as well as blending components.
Photo credit and source: Argus Media
Published: 27 July, 2020
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