HSFO East/West spread at widest in six years on Middle East supply disruptions

The East/West swap spread for high sulfur fuel oil surged to its widest level in six years, underscoring a growing disconnect between a subdued European market and a firmer Asia-Pacific complex.

Platts, part of S&P Global Energy, assessed the front-month paper East/West spread — the difference between 3.5% FOB Singapore cargoes and the equivalent Rotterdam barge value — at $73.50/mt March 16.

The spread was last wider Oct. 21, 2019, when it was assessed at $76.50/mt, highlighting the scale of the latest move. The spread dipped to $71/mt in midday European intraday trading March 17.

Market sources attributed the shift to impacts of the Middle East war, including the near closure of the Strait of Hormuz, heightened geopolitical risk, elevated freight rates, and increasing regional supply concerns.

Asian supply crunch, strong demand

The ongoing disruption in oil flows from the Middle East has pushed Asia's benchmark high sulfur fuel oil cash differential to an all-time high, according to Platts data that goes back to 2009, while traders said tightening supplies will keep the Asian HSFO market well supported in the near term.

The 380 CST HSFO cash premiums in Asia have not seen such levels anytime before or after the International Maritime Organization prohibited ships from using fuels with more than 0.5% sulfur starting January 2020, unless equipped with exhaust-cleaning devices known as scrubbers.

An acute supply crunch stemming from the direct impact of halted shipments in the Middle East, alongside potentially firmer demand from China in the absence of adequate feedstock crude for refiners, will keep supporting the HSFO market in the coming weeks, according to Singapore-based market sources.

This comes as bunkering activity is on a natural upswing as ships increasingly divert routes to avoid conflict zones, with some opting to anchor in Singapore and nearby anchorages, increasing local fuel demand and tightening supplies further, Platts reported earlier.

The M1-M2 intermonth spread for the 380 CST HSFO grade, which was assessed at $62.25/mt at the Asian close March 16, has averaged at a backwardation of $44.16/mt so far in March, compared with an average of $5.59/mt in February, Platts data showed.

Platts assessed the Singapore 380 CST HSFO cargo's cash differential to the MOPS 380 CST HSFO assessment at a premium of $72.60/mt at the Asian close March 16, up $5/mt from March 13. The cash premium was still holding close to $76.60/mt on March 12, an all-time high, according to Platts data that goes back to 2009.

The front-month Singapore 380 CST HSFO crack against prompt-month Brent crude was assessed at plus $5.82/b on March 16. The HSFO refining margin had surged to $16.19/b on March 9, its highest on record since 2010, according to Platts.

NWE market faces outflow risks

In Northwest Europe, HSFO market participants flagged supply concerns amid the ongoing Middle East conflict, despite current ample stocks. Traders noted that strong premiums in Singapore are attracting Latin American and Venezuelan barrels eastward, potentially tightening regional supply.

Fuel oil inventories in the Amsterdam-Rotterdam-Antwerp refining hub fell 5.52% to 805,000 mt in the week to March 12, according to Insights Global, marking a fourth consecutive weekly draw. Fuel oil's share of total oil product inventories in ARA held steady at 14%.

However, Mediterranean traders reported no immediate supply concerns stemming from Middle East tensions, with one source saying: "I don't see issues with avails so far... March [is] well covered." Another described the Mediterranean market as "not uber tight."

The firmer sentiment was reflected in the paper structure. Platts assessed the 3.5%S FOB Rotterdam barge front-month/second-month time spread at a backwardation of $21/mt on March 16, up $1.50/mt from the previous session, though down from the all-time high of $46.75/mt on March 6.