Asian HSFO market structure, refining margins fall to prewar levels on US-Iran deal

The Asian high sulfur fuel oil market structure and refining margins fell to their lowest levels since the war in the Middle East began late February, after the US and Iran reached an initial peace agreement that could reopen the Strait of Hormuz, reinstating the usual oil exports from the Persian Gulf, according to several trade sources and Platts, part of S&P Global Energy, data.

Platts assessed the Singapore 380 CST HSFO July-August swaps time spread at $4.05/metric ton at the June 15 Asian close, weakening its backwardation by about 54% from June 12.

The M1-M2 intermonth spread for the 380 CST HSFO grade, which has averaged at $13.37/mt so far in June, is currently at its narrowest since Feb. 27, when it was assessed at $2.10/mt, Platts data showed.

Platts assessed the front-month Singapore 380 CST HSFO crack against prompt-month Brent crude $1.41/b lower day over day at minus $5.05/barrel on June 15, the weakest level for the refining margin since Feb. 27, when it was assessed at minus $5.15/b. The front-month HSFO refining margin for July was pegged further down at about minus $6.20/b in midafternoon Asian trading June 16.

Although fuel oil markets were seen cooling off amid expectations of a gradual easing of the recent supply crunch, multiple trade sources told Platts they expect it may take months to resume the usual flows and rebuild the drawn-down stockpiles.

"The memorandum of understanding may allow traffic to flow again through Hormuz, but officials are already flagging that reopening will take time due to mines, with a meaningful increase in flows expected over the next one to two weeks and further details due within 24 to 48 hours," Managing Partner SPI Asset Management, Stephen Innes, said June 16.

"It seems everything is coming down ... people are thinking that once the stuck cargoes start coming out, then there could be some selling pressure as there are ships loaded and stranded inside the Strait of Hormuz," a Singapore-based trader said, adding that it would still take weeks for those barrels to arrive in Asia.

A finalized peace deal between the US and Iran would reopen the Strait of Hormuz to Middle East oil exports, but analysts caution that it will take time for flows to normalize, given the infrastructure damage sustained and the buildup of tankers that have been restricted from transiting the Gulf.

"We got to see a while, but expect the [market] structure to be softening ... personally, I don't think the flows will be back to normal so fast," said another fuel oil trader.

"The Strait has been impaired for more than 100 days, and shipping flows do not reboot like a light switch. Production is likely to remain below capacity for some time as vessels, insurance, scheduling and infrastructure all crawl back toward normal," Innes added.

Meanwhile, shipping companies still face high risks in transiting the Strait of Hormuz despite the announcement of the peace deal, security officials said June 15, while warning the resumption of normal traffic could take weeks.

Platts assessed the Singapore 380 CST HSFO cargo's cash differential to the MOPS 380 CST HSFO assessment at a premium of $12.75/mt at the Asian close June 15, down from $27.26/mt in the preceding session, weighed down by competitive offers from Trafigura for H1 July-loading cargoes during the Platts Market on Close assessment process.

The benchmark 380 CST HSFO cash differential, which shed 53% in a single session on June 15, is currently at its lowest premium since March 3, when it was assessed at $11/mt, Platts data showed.

Although HSFO market fundamentals have come off, amid expectations of increased replenishments, seasonal demand from the power generation sector would continue to offer some support to the fundamentals in the coming weeks, according to market sources.

"HSFO [structure] feels more physical. Singapore stocks are at multiyear lows, imports collapsed, and 380 CST cash premium/trading activity is still holding up. Scrubber bunker demand gives HSFO a better base," NitrolOil CEO Shohruh Zukhritdinov told Platts June 16.

Despite that, some Singapore-based fuel oil brokers said all focus has turned to the imminent signing ceremony between the US and Iran in Geneva June 19, before market participants are comfortable taking positions, resulting in tepid derivative flows. The agreement includes a 60-day negotiation period to discuss topics including Iran's nuclear program, according to media reports.