East/West HSFO paper spread flips negative to 7-month low on Middle East peace optimism

The East/West swap spread for high sulfur fuel oil plunged to its lowest level in six months as growing optimism around a potential Middle East peace deal weighed on Asian fundamentals.

Platts assessed the front-month paper East/West spread, the difference between 3.5% sulfur FOB Singapore cargoes and equivalent Rotterdam barge values, at minus $2.25/mt June 17, down $15/mt day-over-day. The spread was last tighter Dec. 1 at minus $3.50/mt.

Asia fundamentals weaken sharply

Asia's HSFO market structure, cash differentials and fuel oil cracks have tumbled to their weakest levels since Middle East hostilities began in late February, pressured by mounting expectations for a preliminary peace agreement between the US and Iran expected June 19 that could reopen the Strait of Hormuz and restore Persian Gulf crude flows.

The Platts assessed the Singapore 380 CST HSFO July-August time spread at 45 cents/mt at the June 17 Asian close, narrowing its backwardation by nearly 95% from a week ago. The Mo1-Mo2 intermonth spread is averaging $11.43/mt so far in June versus $38.56/mt in H2 May,

Also, the Singapore 380 CST HSFO cracks against prompt Brent crude fell $1.62/b day on day to minus $8.055/b June 17 -- the weakest since it was at minus $8.97/b on Jan. 13.

Despite cooling cargo markets amid expectations of supply lengthening, multiple sources said rebuilding drawn-down inventories could take months, while analysts cautioned that flow normalization will be gradual given infrastructure damage and tanker backlogs in the Gulf.

However, freight market sentiment was already improving on supply increase expectations, with one shipbroker noting "definitely bullish" sentiment despite most owners awaiting the peace deal's signing. Higher shipping demand would support downstream bunkering requirements across regions, sources said.

Singapore 380 CST HSFO cargo cash differentials to MOPS 380 CST narrowed to a $4.81/mt premium at the June 17 Asian close from $8.17/mt the previous session -- the lowest premium since Feb. 27 at $4.62/mt.

In the bunker market, Singapore-delivered HSFO premiums against benchmark FOB Singapore 380 CST cargoes spiked to $7.45/mt June 16 before easing to $5.10/mt June 17, still 78% higher than $2.87/mt June 12.

Seasonal power generation demand could also provide some support in coming weeks, sources said.

Europe remains subdued

Northwest European HSFO markets stayed muted with participants citing weak demand and tight prompt supply. While some traders flagged near-term tightness, confidence remained that conditions would ease with HSFO cargo imports.

Bearish physical fundamentals were reflected in paper markets, where front-month HSFO Brent cracks remained under pressure.

Platts assessed the front-month 3.5% FOB Rotterdam barge crack at minus $8.669/b on June 17, marking a day-on-day increase of 9 cents/b.

The market structure reflected similar dynamics, with the balance-month June barge time spread for 3.5% sulfur Rotterdam barges dropping to a three-month low on June 11. Platts, part of S&P Global Energy, assessed the balance-month June 3.5% FOB Rotterdam barge time spread at flat on June 11, before rebounding to $2/mt for two consecutive sessions and widening to a $3.25/mt backwardation on June 17.

Mediterranean markets continued to be quiet, with one regional trader describing the current landscape as a "weak market." However, traders anticipated demand upticks from bitumen and power generation sectors as fresh demand channels for the sulfur grade.