European HSFO garners more support on OPEC+ cuts

London — Unwanted and cheap was the expectation many had for European high sulfur fuel oil after IMO 2020 took effect, but this scenario has failed to materialize. Instead, tight availability has dominated, with OPEC+ oil productions cuts boosting price support further.

Analysts are also warning that due to the OPEC+ production cuts dominated by Middle Eastern producers, fuel oil could become scarcer as these crudes typically yield a higher percentage of the product.

Sour support

The ongoing OPEC+ cuts have constrained the global supply of sour crude, as the largest production curtailments have come from sour crude producing countries such as Saudi Arabia, Kuwait and other Middle Eastern countries, and European refineries have seen lower monthly allocations as a result.

Similarly, Russia's July export schedule for seaborne Urals crude showed daily loadings at 774,310 b/d, the lowest volume since at least 2012, which reflected both the extension of Russia's commitment to the OPEC+ cuts and the impact of increased refinery runs in Russia, which had reduced the quantity of Urals available for export.

As a result, Urals cargoes in Northwest Europe on June 30 saw the highest values since 2001 at Dated Brent plus $2.00/b, with many refineries switching to heavier North Sea grades such as Forties or Johan Sverup, or trying to sweeten their slate to minimize margin losses for much of July.

While Urals prices have eased in recent sessions, traders have warned that the pricing roller coaster could re-emerge for August buying, on a similar situation of another small Urals loading program and few of the typical alternative grades available, such as Iraq's Basrah Light.

"There are not enough sour barrels available, so it will be a big issue for European refineries," a crude trader said. "We need to wait and see how much [overall volume] there is in Urals in August, because [Iraq's] SOMO has also cut July and August allocations all around, not only for Asia, also for Europe. These big cuts means more pressure over crude."

Loadings of heavier, sour crudes globally have been disproportionately affected by the OPEC+ cuts, leaving refiners with few alternatives.

As a result, "some refiners in Northwest Europe started to purchase more light crude from the US and West Africa and subsequently produce less fuel oil," marine fuels management company Integr8 said in a recent research note

Fuel oil output from Russian refineries has also declined after they reduced runs in response to lower availability of crude from OPEC+ production cuts.

Tight supply

In line with the IMO 2020 sulfur cap rules, refineries adjusted their focus to 0.5%S marine fuel while limiting production of 3.5%S material, as many warned that IMO 2020 would be the death of it.

Prior to the OPEC+ production cuts, Northwest European high sulfur fuel oil supply was already tight due to reduced imports from the Baltic, as it skated past the region to be used as coker feedstock in the US instead, sources said. Fuel oil has become "a favorite secondary feedstock for refiners," the International Energy Agency said in its most recent monthly report.

Volumes to the US Gulf Coast from the Baltic Sea rose to 736,000 mt in June, up from 243,000 mt in June 2019, according to data intelligence provider Kpler.

Baltic Sea volumes in to the Amsterdam-Rotterdam-Antwerp region, however, fell to 524,000 mt in June from 1.308 million mt in June 2019, a 60% decline, the data showed.

This has led to stronger-than-expected crack margins for the product, with the 3.5%S FOB Rotterdam Barge crack last assessed at minus $5.807/b on July 16, up from lows of minus $33/b in November. One source previously said that "many people would have bet their lives on high sulfur cracks being below minus $35/b for 2020."

Market sources have said that the support and subsequent backwardation drove the shorter route to the West over the voyage East.

This has led to rarer movements of HSFO from Singapore supplying the Saudi Arabia, which typically looks to Europe for supply during the summer months on utility demand for air conditioning.

Unlike other fuel oil products, the HSFO forward curve has seen significant strengthening as the markets recover from the coronavirus pandemic. The 3.5% FOB Rotterdam barge swaps curve has been in backwardation since the start of June, with the timespread between July and January assessed at $5.25/mt on July 15.

Rotterdam bunker strength

While IMO 2020 turned a large proportion of shipping fuel demand away from HSFO to cleaner fuels, Rotterdam still saw HSFO demand equate to 25.9% of total bunker sales in the first quarter, according to data from the port authority.

With estimates of roughly $2 million per vessel, installations of exhaust cleaning scrubber systems allow shipowners to burn the dirtier fuel while still complying with the sulfur cap rules.

However, less supply reaching the bunkers sector has boosted HSFO bunker prices at Rotterdam, Europe's largest hub. In particular, the June average in Rotterdam priced above Fujairah for the first time since July 2013, Platts data shows.

Typically pricing below other global bunkering hubs, Rotterdam's discount has narrowed since April, showing its relative strength. The spread between delivered prices at Singapore and Rotterdam has narrowed 44% since April, while the spread between Panama Canal ex-wharf prices narrowed 85% in the same time period, Platts data shows.

Looking further ahead, HSFO demand from the bunkers sector is set to increase as more scrubbers are fitted on vessels, but the pace of scrubber fittings has decelerated due to coronavirus-related slowdowns at shipyards, a reluctance to set aside capital during a global financial downturn, as well as worsened payback economics.

As a result, S&P Global Platts Analytics has lowered its projection of installations at the start of 2021 to 3,100 from 3,500.

However, the recent announcement from the OPEC+ coalition to roll back production cuts to 7.7 million b/d from August could see balances switch again if refiners choose to cautiously increase refining runs. Amid many outlook uncertainties, this was certainly not the year many expected for European HSFO.