SINGAPORE: Competing demand for Western fuel oil from China and the Middle East has drawn significant volumes from the Singapore trading hub this month, allowing bullish pricing interests to continue to hold sway for a third month, traders said on Tuesday.
Traders said it is rare for Western arbitrage cargoes to flow into the Middle East, which is normally self-sufficient in terms of supply, while more than the usual volumes, among January’s arbitrage arrivals into East Asia of 4.0-4.1 million tons, are drawn into China’s feedstock market.
The same is expected for February, which is also heavily supplied with four-month high volumes of 4.3-4.4 million tons, according to Reuters data.
"Part of the apparently heavy January-arrival figures were actually straight-run fuel oils going into China as refining feedstocks that exist as a separate market from the high-sulphur cracked fuel oil that is traded daily," a Singapore-based Western trader said.
"Also, some of the cargoes are being diverted to the Middle East because of the lower sulphur requirement for the marine fuels market that started this year."
Price levels in Asia have held at strong, record-breaking levels for nearly three months, with the front timespread peaking to backwardation of near $20.00 a ton and cash differentials breaking all-time highs at premiums of $18.00-$20.00 in the past three to four weeks.
At midday Tuesday, February/March was valued at $15.00 a ton, while cash differentials for the 180-cenbtistoke (cst) and 380-cst grades were at premiums of $16.25 and $17.65 respectively.
Of the 4.0-4.1 million tons of cargoes that are landing in Asia this month, only 3.2-3.3 million tons are for Singapore, and mostly for its marine fuels market, the world’s largest.
About 420,000 tons are bound for the Middle East bunkering port of Fujairah in the United Arab Emirates, the third largest in the world with monthly demand of about 1 million tons, while another 350,000 tons are refining feedstocks into China.
The rare Middle East demand was due to insufficient regional supplies of lower 3.5 percent sulphur fuel oil, following a global specification change for marine fuels from Jan. 1, as regional production is at around the 4 percent levels.
Bunker players had to turn to the international market to make up the supply shortfall, with the 420,000 tons coming from two 130,000-ton suezmaxes and an 80,000-ton aframax from the Mediterranean, and another aframax from the ARA.
China’s teapot refiners are buying up alternative grades of straight-run fuel oil as feedstocks due to a shortfall in exports of the preferred M100-grade of fuel oil from eastern Russia and lower production of domestic crude following the shutdown of CNOOC’s Penglai oil rigs.
China’s demand for refining feedstocks has been strong since November, with an estimated 1.5 million tons expected to have been imported for December-arrival, while about 600,000 tons and 900,000 tons have been booked for January and February arrival so far.
The world’s second largest oil consumer imported an average of 2.2 million tons of fuel oil per month, mostly as refining feedstocks and marine fuels, up to last November, its largest monthly-average since 2006.
Among the February-arrival bookings, about 780,000 tons, on board two Very Large Crude Carriers (VLCCs), a 130,000-tonne suezmax and a 100,000-tonne aframax, are bound for the refining region in North China. No Fujairah-bound bookings have been seen as yet.
About 3.5-3.6 million tons are expected to land Singapore, with an unusually large volume, on board six VLCCs, from Europe, in addition to another six from the Caribbean.
Russian major LUKOIL has three of the supertankers for loading around mid-January in the Amsterdam-Rotterdam-Antwerp (ARA) region, but only one is expected to arrive next month due to loading delays that resulted from congestions at the oil terminals.