Narrow east-west spread to keep Nov LSFO arbitrage to Singapore low: traders
21st October 2020 09:10 GMT

Singapore is expected to receive 1.5 million-2 million mt of low sulfur fuel oil from the West in November, similar to October, as the LSFO spread between Asia and Europe was narrow when the November-arrival cargoes had traded, traders told S&P Global Platts on Oct. 20.

Singapore typically receives 2 million-3 million mt/month of LSFO from Europe and the Americas, and the volume is expected to decline to close to 2 million mt in October.

The inflow of arbitrage cargoes is "1.5 million mt-2 million mt [in November] at most", adding to the supply tightness in the Asian LSFO market, a fuel oil trader in Singapore said.

Fuel oil traders also said Asia's LSFO market was slightly weaker than Europe's in September, when they were trading November-arrival cargoes, even though Asia's LSFO market firmed during the month.

The spread between the value of Singapore Marine Fuel 0.5%S and the FOB Rotterdam Barge Marine Fuel 0.5%S, otherwise known as the east-west spread, averaged $20.01/mt in September, down from $21.25/mt in August, and $22.12/mt in July, Platts data showed.

In Europe's very low sulfur fuel oil market, the 0.5% sulfur marine fuel has been contending with refinery run cuts, which has resulted in limited availability, while feedstocks used for blending are likewise scarce.

"There is not much product [Marine Fuel 0.5%S] around," one Mediterranean market source said, adding that straight-run LSFO used in the Marine Fuel 0.5%S blending pool was too expensive.

However, the source noted that market participants are continuing to arbitrage cargoes east as the domestic Northwest Europe and Meditteranean markets are not seeing as much demand as Singapore.

In Europe, the Brent crack spreads for Marine Fuel 0.5%S have strengthened significantly to become the most profitable oil product used for transportation purposes in the continent. 0.5%S FOB Rotterdam barge cracks were assessed at $4.92/b on Oct. 20, rising from $3/b on Sept. 24.

European demand remains below pre-coronavirus levels, market sources said, with many uncertain on the outlook as second waves of infections amplify lockdown restrictions within Europe.





With lesser supply expected in October and November, the marine fuel 0.5%S market was quick to strengthen. The Singapore front month Marine Fuel 0.5%S timespread flipped into backwardation on Sept. 25, after remaining in a contango for seven months.

The November-December spread was assessed at $1/mt on Oct. 20, edging down 25 cents/mt from the previous day, Platts data showed.

"Now the market is backwardated. Traders don't want to hold so much stock," a Singapore-based fuel oil trader said, adding that this could be one of the reasons that led to the low inflow of arbitraged cargoes.

"Some bunker suppliers are offering low, probably because they want to clear stocks [in light of the backwardated market structure]," a third trader said.

Given the short supply situation, it is unlikely that the market structure in Singapore will flip to contango any time soon as refiners were lowering run rates, market sources said.

In Europe, the spread between the value of physical cargoes and its derivatives had remained in a shallow backwardation in recent weeks, suggesting that the LSFO strength laid mainly in the prompt. The cash differential between physical VLSFO barges and the front month swaps, or the cash-paper spread, was assessed at $4/mt on Oct. 20, little changed since Oct. 8.

Platts ,
21st October 2020 09:10 GMT