The largest impact felt by the oil markets, as a result of recent events in Venezuela and Iran, has been in the high-sulphur fuel oil (HSFO) market, which has seen the product’s prompt inter-month timespreads surge to a steep backwardation after being mired in contango for the preceding three months.
The front-month February/March timespread for high-sulphur 380-cst grade fuel oil, typically used as a gauge for the strength/weakness of the high sulphur market, filled into backwardation on Jan. 7, hitting a 7-month high of $8.98/mt on Jan. 20 and averaging at $5.26/mt during the period, up till Jan. 21, surging from an average of $2.48/mt in contango between Oct. 16 and Jan. 6.
The surge is largely driven by fears of disruption to HSFO supply, of which the two sanctioned countries account for substantial volumes into Asia.
Most of these barrels are often not sent into Asia directly, mostly via floating storages offshore Singapore and shore tanks in Fujairah. Most end up either as refinery feedstocks in China or as marine fuel in the Singapore bunkering hub.
However, the expected supply tightness has yet to impact on the prompt market, with premiums for bunker ex-wharf 380-cst parcels still weak at around $1/mt, averaging at 89 cents/mt between Jan. 7 and Jan. 21, weaker vs the Oct 16/Jan 6 average of $1.95/mt.
This signals that the prompt market remains well-supplied, as demand, both from the Singapore marine fuels and China feedstock markets have been lacklustre. There are sufficient HSFO supply, including Iranian and Venezuelan cargoes, in storage; and incoming supply, particularly from Iran, have yet to see any actual disruptions.
It may well be a case, that the strong forward paper market is a result of pricing agendas, which is not likely to translate into the prompt, physical market.
Wood Mackenzie's VesselTracker allows you track all the flows and movements at hubs such as Singapore.
