HSFO tightness in Mediterranean sees product spreads narrow; Med-North turns positive

HSFO markets in the Mediterranean are experiencing a period of increased strength amid lower supply, a lack of key blendstocks and refinery turnaround periods.

In physical HSFO markets, dented supply due to blendstock tightness and refinery maintenance has boosted Mediterranean HSFO prices, amid a lengthy dispute over crude exports among Iraq, Kurdistan and Turkey.

As a result, the Mediterranean Hi-5 spread -- the premium for 0.5%s material relative to 3.5%s product -- has narrowed on the back of HSFO strength in the Mediterranean.

The physical spread between outright 0.5% and 3.5% CIF Mediterranean cargo prices was assessed at $97.25/mt May 5, down 16% on the month and reaching its lowest level since Oct. 11, 2021, when it was assessed at $96.75/mt.

"HSFO markets are picking up in the Mediterranean," one Mediterranean based trader said. "It's mostly supply driven. We're also seeing refineries keep barrels for bitumen production."

More refineries have been increasingly moving toward bitumen production, in a seasonal move away from HSFO production, which has further dented supply. Refineries will typically pivot from HSFO production toward bitumen in the lead-up to road construction season in the summer.

Increased refinery maintenance has also contributed to HSFO tightness in the Mediterranean, with Greece's Motor Oil Hellas currently carrying out maintenance at its Corinth refinery, according to sources.

This is expected to cause further tightness across HSFO markets, with less Greek product available for export around the Mediterranean.

"There is some unplanned maintenance going on in May and June in the Mediterranean, meaning the market is short of oil," another fuel oil source said.

Missing blending components exacerbate tightness

Also, an ongoing legal dispute among Iraq, Kurdistan and Turkey has halted around 400,000 b/d of oil exports, mainly from Iraq's semi-autonomous Kurdistan region, since March 24. The drop in Kurdish supply has hit Mediterranean refineries particularly hard, with Italy's API, Sarroch and ISAB refineries pivoting to Iraqi crude in recent months, along with several Greek refineries.

"We aren't seeing much liquidity in Mediterranean markets at the moment," a different fuel oil source said. "There really aren't many HSFO cargoes in the market."

The fall in sour crude availability has dented residual fuel production in the Mediterranean and has caused further tightness across key blendstocks available for use in the fuel oil market. This has been a key challenge for European fuel oil blenders since the imposition of sanctions on Russian product, with European and Mediterranean VGO markets facing severe illiquidity.

"Refineries are competing for heavy sour crude," the first trader said. "The Kurdish crude dispute has had some impact, but the OPEC cut is generally creating some problems."

Strength continues across paper markets

Paper markets have echoed the trends seen in the physical market, with prompt strength in the 3.5% Mediterranean fuel oil paper market and relative weakness in the Northwest European equivalent causing the Med-North spread -- the differential between 3.5%S Rotterdam barge and Mediterranean cargoes markets – to invert, causing Mediterranean product to flip to a premium for the balance month May 5.

The 3.5% Med-North balmo swap was assessed at positive $2/mt May 5, which is the first time the Mediterranean cargo balmo swap was assessed at a premium to the Rotterdam barge balmo swap since March 14, 2020, when the Mediterranean cargo reached an even steeper premium over Northwest Europe.

Further down the swaps curve, the Med-North spread has continued to narrow significantly, but the Mediterranean cargo swap has yet to reach a premium over the North. The front-month spread narrowed to zero May 3, which marks its lowest valuation since March 23, and it has remained at that assessment level in the two sessions since May 3. The second month Med-North swap assessment reached and remained at minus 50 cents/mt over the same span, which is its lowest level since March 24.

Malta bunker Hi-5 spread narrows amid HSFO tightness

The tighter HSFO market has resulted in a narrower Hi-5 spread in downstream bunker markets, with various ports across the Mediterranean seeing a tightening in product amid higher premiums.

Malta has seen the most significant narrowing, with Platts assessing the Hi-5 at $10/mt May 5, down $36/mt on the month.

This is primarily due to tighter bunker supply across the island, stemming from busier than expected loading schedules, sources said. Fewer terminals have been available to load ships with HSFO in the region, due to the destruction of two terminals by a storm in February. Both terminals were used to load HSFO.