Low-grade fuel oil glut may up bunker costs
Asia marine fuel costs could climb in coming months, defying near-record fuel oil stocks in top bunkering port Singapore, as traders struggle to get enough blending fuels to make bunker for the heavy shipping traffic. The region is getting above-average Western fuel oil inflows this month and may see record imports for April, but most are low-grade residues from Russia and Mexico, unsuitable for direct use by ships, traders said
This stokes an unusually high demand for better-quality fuel with low viscosity of between 5 and 100 centistoke, which traders use to blend with the raw cargoes in onland tanks or floating storage to make the 380-cst bunker or marine fuel grade.
A total 3.3-3.4 million tonnes of Western cargoes have been fixed for March while April volumes are at 3.7-3.8 million tonnes, the highest since September and above last year"s monthly average of 3.0 million tonnes. Up to 60 percent are high-viscosity 600 to 800 cst raw cargoes, including M100 fuel oil from Russia.
The problem with this market is that it operates on a herd mentality, a Singapore-based Western trader said. Everyone has the same opinion on the dynamics and we all ended up with too much high-viscosity cargoes and not enough cutters.
Traders said under normal market conditions, such high imports and stockpiles would have pummelled prices of bunker if the imported cargoes are of the better grade 380-cst fuel oil that are normally sent from Europe and ready to use by ships. But the lack of cutter fuels, or what the industry refers to as slurry, to improve the quality of the disproportionately high volumes of low-grade cargoes, has kept bunker prices at firm levels since January.
The strength is set to last through end-April or possibly first-half May, which may in effect increase the costs for shippers, even as the gradually improving global economy is rekindling shipping movements.
Bunker premiums the price spread between retail marine fuels and fuel oil cargo values have held firm near $2.00 a tonne since January, resisting the weakness in the cargo market that has plunged differentials into the red. At $1.00-$2.00 a tonne, bunker premiums are not very strong, when the market has seen $10-$20 premiums in the past in cases of severe supply tightness, said another trader with a Singapore-based Asian trading house.
But taken into the context of just how weak the cargo and swaps markets are, the bunker premiums have managed to hold admirably.
Traders said bunker premiums could rise further if cargo supplies tighten after May. Inventories in Europe, which had been built up by the surge in flows of low-grade fuel oil from Russia after months of loading disruptions due to bad weather, could start to be drawn down and ease the supplies to Asia. European shipments, including the better fuel oil grades, would decline further as refiners cut production during spring maintenance.
The lack of viscosity cutters prompted trading firms such as Glencore, which traders said has big volumes of low-grade Russian and Mexican cargoes for March and April, to use 180-cst fuel oil to blend high-viscosity barrels into the 380-cst bunker grade.
Traders said the 180-cst grade is not the most efficient of blendstocks for cutting viscosity, unlike lower viscosity fuel oil, because larger volumes are required.
The 180-cst grade used to be the main fuel used by Asian utilities and as bunker, but China is increasingly using gas and coal for power generation, while new and more efficient ships enable greater use of the cheaper 380-cst fuel oil.
This explains Glencore"s move to trade the price spread between the 180 and 380 cst grades, in what the market describes as a bull trading play to leverage the market"s current fundamentals.
These dynamics have impacted the forward swap markets where traders hedge their positions or for speculative trade widening the prompt March and April price spread between the two main fuel oil grades to year-high levels of $9.00-$10.00 a tonne.
The March viscosity spread has been rising from $5.50 a tonne on February 2 to $10.25 by midday on Friday, the highest since December 15, 2008.
Its physical settlement price, which will be used to settle swap trades on the contract, hit a 14-month high of $12.75 a tonne on March 5 and stayed above $10.00 for the past four sessions, well above last year"s average value of $3.15.
The strong demand has driven up costs of blending fuels such as light-cycle oil (LCO), which has viscosity below 100-cst, to premiums above $20.00 a tonne versus normal levels around $10.00.
A cargo of another cutter, the 3 to 35-cst pyrolysis fuel oil from Taiwan"s Formosa for end-March loading, traded at $40.00 a tonne above Singapore spot quotes, free-on-board basis, almost double its previous deal for February at $20.00-$25.00 premiums.