European fuel oil hi-lo hits two-year high on refinery maintenance, firm demand
The premium of FOB Northwest Europe 1% sulfur fuel oil cargoes to 3.5% sulfur FOB Rotterdam barges — known as the hi-lo spread — has surged to its highest level in over two years, assessed up $0.75/mt at $24.75/mt Wednesday.
Traders said that planned refinery maintenance in Europe had reduced supply somewhat and that demand in Asia had been surprisingly strong.
On a crack basis, FOB NWE low sulfur fuel oil cargoes have reached minus $5.46/b to Dated Brent, the highest since their spike in April 2014.
“There’s plenty of unfilled demand at the moment,” said one trader Wednesday, citing unfilled LSFO short positions into Cyprus and Lebanon.
West Africa regularly takes around two cargoes a month of LSFO, traders say. Turkey buys a similar amount, as long as natural gas continues to undercut LSFO as a power generation fuel — as it usually does except during exceptional periods like in the first quarter his year.
“We’ve seen strong numbers on low sulfur tenders in the East,” said a second trader Thursday. “Perhaps on this low sulfur gets arbed out, leaving us a bit short in Europe.”
The most recent Asian LSFO tender was into Taiwan, which went at a similar level to last month’s, around the Singapore fuel oil MOPS 180 CST benchmark plus $50-55/mt, according to traders.
In terms of European LSFO demand, traders said they were surprised by strong buying interest seen from BP this month, in both Northwest Europe and the Mediterranean, as the main end-user demand for the product in Europe — Mediterranean island utilities for power generation — typically falls away at this time of year.
“We’re definitely seeing a bit less demand [in the Med],” said the second trader.
European LSFO supply meanwhile has been constrained by works at several refineries. The Kalundborg plant in Denmark took its visbreaker down a few months ago, meaning it is only producing low sulfur straight run, rather than cracked LSFO. Traders are uncertain when it will return to producing cracked LSFO.
Norway’s Slagen refinery, a key producer of LSFO, is currently undergoing maintenance work, the company said Thursday. Traders indicated that the maintenance would likely be extended until November due to complications with the restart.
La Rabida, or Huelva, refinery in Spain is in partial maintenance until December, also limiting LSFO supply.
Meanwhile, supply of LSFO from Brazil into Europe is expected to be limited until next year now, said traders, due to increased domestic demand.
On paper, the front month hi-lo swap has gradually firmed since the beginning of September, amid seasonal turnarounds at refineries in Europe.
The front month hi-lo spread reached its highest in over two years at $18/mt on October 10, after which it slightly retreated to $17.50/mt Wednesday evening. The last time the hi-lo swap was higher was on August 1, 2014, when it reached $18.75/mt, Platts data shows.
LESS STRONG HSFO
The spread between LSFO and high sulfur fuel oil has also been widened from below, by a softer HSFO barge market after a very strong September, said traders.
FOB Rotterdam cash barges verses front-month swaps have narrowed from $5.00/mt in August and $4.50/mt in September to just $1.00/mt as of October 12.
FOB Rotterdam barge cracks reached their highest in three-and-a-half years in late September, at minus $7.95/b to Dated Brent on September 26, before weakening on sentiment that Northwest Europe will receive increased supply relief from Russia.
Previously seen output increases in Russia should now be hitting the Rotterdam market after the shipment time is taken into account, said another source.
The market is pricing in a bit of extra length in the next two to three weeks, he added.