- MARINE FUEL 0.5%S: Global VLSFO market struggles to cope with excess of supply, poor demand
June maintained the bearish tone of the second quarter of 2020 in the global low sulfur fuel oil market, with the double blow of lackluster demand and supply length capping any potential rise in refiners' margins as countries emerged from the lockdowns imposed to contain the spread of the novel coronavirus.
Bearish fundamentals in Asia ensured that the crack spread, measured as the difference between the front-month Singapore Marine Fuel 0.5% swap and the Dubai crude oil swap, kept the average June crack firmly in single-digit territory at $6.76/b, only marginally higher than May's average of $6.28/b.
In the world's largest bunkering hub, Singapore, June demand — as measured by low sulfur bunker sales — is expected to be slightly lower than May's sales of 2.7 million mt, with bunker suppliers surveyed by S&P Global Platts citing the collapse in prices in June as the reason shipowners were hesitant to commit in the third quarter to receiving similar LSFO volumes to Q2 on contract.
In the face of soft demand, some refiners — such as Formosa Petrochemical Corp. in Taiwan — are choosing to reduce their output of low sulfur fuel oil in July, while others aim to carry out turnarounds of their residue desulfurization units in July while margins continue to be narrow.
Overall, supply from the export tender market held fairly steady in June, with refiners in Taiwan, Thailand and India exporting a combined 230,000 mt of LSFO in June, only marginally lower than May's 235,000 mt.
These run cuts or turnarounds were effectively negated by the nearly 4.5 million mt in imports that landed in Singapore in the May 28-June 24 period, according to Enterprise Singapore data.
Adding to the surge in imports was the ongoing glut of inventory floating off the coast of Singapore, with LSFO volumes still estimated to be about 4.5 million mt, compared with March's estimate of 5 million mt, when most Asian countries started enforcing lockdowns.
With the lockdowns being lifted by late May across most countries in the region, June witnessed a collapse in the Singapore Marine Fuel 0.5% differential to the Singapore Gasoil 10 ppm market, as returning demand for gasoil saw a surge in the Singapore 10 ppm prices, while LSFO demand languished at levels comparable to May.
"There are traders who have bought LSFO cargoes a couple of months ago at approximately $25-$30/mt below gasoil, and would now have to sell in today’s market at $55-$60/mt below gasoil," said one Singapore trader, adding: "So it's a better proposition to just store it for a few months and hope the contango will mitigate some of the loss."
To put this into perspective, on the last day of June, Singapore Marine Fuel 0.5% was assessed at a $62.20/mt discount to the Mean of Platts Singapore gasoil 10 ppm assessment, the widest discount since November 25, 2019.
In the bunker market, the collapse in the LSFO market relative to gasoil spurred shipowners to reduce some of their term contract volumes in Q3 ex-wharf contracts, "to try and take advantage of the fall in prices," according to a Singapore-based bunker supplier. In addition, more competitive prices in China as a result of state-owned producers like Sinopec ramping up LSFO production also contributed to a fall in the number of vessels calling at Singapore, according to traders.
The situation was not much different in the other major bunkering hub in Asia, Fujairah, with LSFO bunker demand having plummeted nearly 50% since the start of the year to about 400,000 mt/month, as a result of the coronavirus pandemic.
"Here though, the storage situation is more dire, as some people are holding three to four months’ worth of Fujairah LSFO demand in storage, and in the very likely scenario that demand doesn't recover soon, there'll be more of a flow to Singapore even against arbitrage economics," said a trader.
The European 0.5%S marine fuel market continued to see supply-side pressure in June, as the return of demand was not forthcoming due to the impact of the pandemic.
Stock builds in the Amsterdam-Rotterdam-Antwerp hub were seen throughout April and May, leaving the market with ample inventory, while arbitrages remained unworkable and demand weak despite the easing of lockdowns across Europe.
Combined stocks in the Amsterdam-Rotterdam-Antwerp hub averaged 1.449 million mt through April and 1.712 million mt in May, as measured by Insights Global. Meanwhile in June, stocks decline to 1.502 million mt in the seven days to June 24, the data showed.
The contango in the 0.5%S marine fuel market started to flatten toward the end of June, weakening storage economics, prompting many to release barrels from storage, sources said.
Arbitrage opportunities to send product east were also limited, as the fuel oil market in Singapore also was grappling with an excess of supply, leaving fewer outlets for European product.
While very low sulfur fuel oil saw weakness, high sulfur fuel oil found support in the revamped environment. This was reflected in tight availability reaching the European bunker pool on occasions.
The spread between 0.5% and 3.5% sulfur FOB Rotterdam barge assessments fell nearly 82% from $321.50/mt on January 3 to $58.50/mt on June 30, Platts data showed. However, in June, the spread did start to widen, having begun the month at $41.50/mt.
The end-user bunker market found a similar rhythm, with the spread remaining relatively narrow. Analysts expect the "scrubber bet" differential to remain under pressure until 0.5%S marine fuel supply overhangs ease.
Outright prices in Europe started to recover, with 0.5%S FOB Rotterdam barges seeing a 19% increase to $283.25/mt on June 30 from $237.75/mt on June 1. But the price was still 51% below the $576.25/mt high seen just after the debut of the IMO 2020 regulations on January 3.
In the European bunker market, 0.5%S marine fuel delivered prices have strengthened alongside the crude complex, but buyers are optimistic as prices remain much lower than the price spikes expected as a result of IMO 2020.
Demand for the fuel in Europe continues to face pressure from reduced shipping operations, but June saw grass shoots for a revival for the sector toward the end of the month.
One source said the flatter contango was indicative of some recovery in the market, adding that July looks set to see some improvement in demand.
Outright US marine fuel 0.5%S prices continued to rebound in June, though the market once again failed to see demand from any major outlet, which maintained the supply overhang, sources said.
US Gulf Coast marine fuel 0.5%S was assessed at an average of around $275/mt in June, compared with a May average of around $220/mt, Platts data showed.
The product reached as high as $293/mt on June 22, its highest level since March 6, before the pandemic shuttered a substantial portion of the global economy.
Despite this recovery, market participants said demand prospects were poor, especially for the retail bunker market in Houston.
US fuel oil stocks for the week that ended June 26 totaled 42.149 million barrels, an increase of 9% compared with the end of May, and a jump of around 36% since late January.
Retail USGC marine fuel 0.5%S prices in Houston were assessed at an average discount of around $3/mt to the bulk assessment in June.
Sources said the lack of bulk trading during the month resulted in the US trending with other global markets and a lack of price transparency.
One source said bunker suppliers have to move and clear inventories on a more frequent basis. To entice buying interest from shipowners, the suppliers frequently had to sell at discounts to bulk markets.
“Around 90% of my business this month has been HSFO. That’s how bad the LSFO market has been,” one US broker said.
The ongoing contango structure for USGC marine fuel 0.5%S has encouraged bulk suppliers to hold on to product and to wait for buying interest to return to pre-pandemic levels.
Market participants in June were hopeful refiner feedstock demand pickup would eliminate some of the oversupply in the USGC, but sources said refiners rarely bought additional LSFO on too of what they produced internally. There were no reported US imports of LSFO in June, Kpler data showed.