The Asian low sulfur fuel oil market is drawing in feedstocks for blending into the marine fuel 0.5% pool that typically go into making clean fuels like gasoline, especially low sulfur vacuum gasoil, market sources said Tuesday.
Dwindling demand for gasoline due to the coronavirus pandemic has prompted refiners around the world to slash run rates or even shut secondary units, mainly residue fluid catalytic crackers, where this product usually finds use.
A majority, if not all, of this material that has been finding its way into Singapore has originated from the US, where the impact on gasoline markets has been most pronounced due to travel restrictions imposed to contain COVID-19.
"Lots of it coming from US," a senior fuel oil trader at a western trading company said.
Reflecting weak demand fundamentals, the front month US RBOB/Brent crack spread has remained firmly in the red since late March, averaging minus $3.46/b month to date in April, sharply lower than the March average of plus $4.44/b, Platts data showed.
The prompt month US RBOB/Brent crack spread fell to a record low of minus $7.45/b on March 24 as domestic driving demand in the US was curtailed with at least 50% of the country under lockdown.
"US gasoline demand is so weak, they cannot do anything with that [product] even though freight rates are higher," another trader said.
Even as freight rates for tankers have surged in recent weeks, traders have been looking to fix vessels to move LSVGO east, sources said.
The freight rate for a 60,000 mt long range tanker on the US Gulf Coast to Japan/South Korea route has risen from a near 5-week low of $37.50/mt on March 26 to $46.67/mt Monday, S&P Global Platts data showed.
"Some traders were able to fix [LSVGO] to Asia a couple of weeks or so ago, but at $50/mt freight, I'm not sure that can continue. The US refiners are shutting down, but they could find a way to store this product [there]," said a third fuel oil trader at another western trading company.
Still, a supply overhang coupled with a lack of outlets in the West for the product was persuading oil traders in Asia to compare MF 0.5% blending costs with the landed cost of LSVGO, traders said. "We heard some volumes were done a few weeks ago... as long as it comes cheaper than our blending cost," another fuel oil trader said.
LSFO STOCKS MAY NUDGE HIGHER
While the volume of arbitraged LSVGO that may end up in the marine fuel 0.5% pool in Asia is expected to be less than considerable, the incremental supply is expected to bump up stocks in and around Singapore, traders said.
Market sources estimate more than 10 million mt of low sulfur material is currently stockpiled in landed tanks and on floaters in and around Singapore.
The arbitrage volume of low sulfur marine fuel fixed to date to arrive in Asia in May is said to be currently less than the 2.5 million mt that is estimated to land in Singapore for April, but the market is likely to be well supplied on account of the ample inventory, traders said.
"VLSFO supply will increase because VGO is going into the LSFO market," a trader said.