Singapore’s LSFO arbitrage arrivals from the West to fall in May, June: traders

Singapore's low sulfur fuel oil arrivals from the Western markets are set to fall for the fourth consecutive month in May, amid largely unfavorable arbitrage opportunities due to steep backwardation, multiple Singapore-based traders told Platts, part of S&P Global Energy, during the week to May 22.

The monthly decline in Western inflows is expected to extend further into June, exacerbating the strain in on-specification LSFO availabilities in Singapore, the world's largest bunkering hub, traders said.

Singapore is now expected to receive about 1.1-1.2 million metric tons of LSFO from the West in May, down from 1.4-1.5 million mt in April, according to the traders. Replenishments in June are expected to further tighten by about 400,000-500,000 mt, likely taking June Western arbitrage volumes to as low as 600,000-800,000 mt.

Nevertheless, some traders expect the current market tightness to start easing in July, when more shipments from Europe are expected to land in Singapore, but added that it was still early to define a trend.

Singapore's elevated LSFO cargo premiums have incentivized some Western cargo inflows in recent weeks, but a majority of traders were still hesitant to bring down significant volumes to avoid building stockpiles in a steeply backwardated market, a trader said.

The West-East arbitrage window has remained mostly shut so far in May, although record-high freight rates have cooled over the last few weeks, according to some of the sources.

Platts assessed the front-month spread between Singapore marine fuel 0.5%S cargo and FOB Rotterdam 0.5%S barge assessments, or the East-West spread, at $87.25/mt on May 21, down $13.75/mt day over day. The spread, however, has widened about 60% so far in May, Platts data showed.

The dearth of blending components and very low sulfur materials, coupled with persistently steep backwardation, has led blenders to slow down LSFO blending activities. "This is creating further tightness of on-spec supplies," a trader said.

The ongoing US-Israel war with Iran and blockades in the Strait of Hormuz continue to disrupt the usual LSFO blending components from the Middle East, which typically find their way into the LSFO blending pool, according to three traders.

"Sweet crudes have been going to the refineries as feed," a trader said, while another trader added that some of the alternative low-sulfur blend stocks available in the region were difficult to blend due to their high metal content and high pour points.

The sulfur cutters in Singapore were looking extremely tight, especially as some of the medium-sulfur barrels coming into Singapore from Brazil cannot be easily blended down to the on-specification 0.5%S grade, the traders said.

Platts assessed the Singapore marine fuel 0.5%S cargo's differential over the Mean of Platts Singapore marine fuel 0.5%S assessment at a premium of $39.86/mt at the Asian close of May 21, down $1.47/mt from the previous session. The cash premium, however, has gained 26.5% in the last two weeks, Platts data showed.

Scarcity in European LSFO market

The European LSFO arbitrage window to Singapore has remained closed for much of May despite a decrease in dirty tanker freight rates, according to Northwest Europe-based trader sources.

Europe has experienced a similar shortage of low-sulfur blending components, with many of these barrels being sold into the European feedstocks market amid high refinery demand.

This dynamic led to high blending costs, resulting in tight supply in the VLSFO market for much of May, the sources said.

"Blend components are going into the feeds market ... so it is expensive to blend," said an NWE-based trader.

While mid-sulfur barrels have been plentiful, market participants see most of these volumes sold into the European HSFO blending pool amid continued negative paper Hi-Lo spreads. Therefore, traders see better value in selling these volumes locally than sending them to the East.

Market participants noted an easing in VLSFO supply tightness in recent days, as blending components become more available.

"Amsterdam-Rotterdam-Antwerp tightness is getting solved from a components perspective," another source said.