MARINE FUEL 0.5% WRAP: High freight costs close most arbitrage opportunities

Asia

The Asian low sulfur fuel oil market is expected to garner some strength from limited availability of on-specification grade supplies, but relatively lackluster downstream bunker demand would likely cap any major upside in the near term.

Singapore's low-sulfur marine fuel arrivals from the Western markets are expected to be marginally lower in October, partly due to unviable arbitrage economics earlier amid steep freight rates, but trade sources said the region should see an uptick of cargo inflows in the second half of the month and going into November.

The world's largest bunkering hub, Singapore, is now expected to receive around 1.5 million-1.6 million metric tons of LSFO from the West in October, potentially inching down from about 1.6 million-1.8 million mt in September, Platts reported earlier.

Platts assessed the spread between Singapore marine fuel 0.5%S cargo and FOB Rotterdam 0.5%S barge assessments, or the East-West spread, at $152/mt on Sept. 29, firming from $145/mt on Sept. 28. The East-West spread, which has widened nearly 17% since mid-September, is currently at its maximum since it hit a record high of $165/mt in March, according to Platts data that goes back to April 2022.

October should not see a massive drawdown in inventories, but it would still be a drop in stocks, said one Singapore-based trader, while another trader, discussing the recently widening spread between Singapore and Rotterdam LSFO prices, said "the East-West [spread] has rallied hard to catch up with the freight rates."

"Freight is still quite strong, so, if someone is trying to accumulate cargoes in Europe and then bring over, that economics might not work, but if it's a bigger player or someone with refinery cargoes, then they can make the arbitrage economics work," said a third trader.

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 $30.08/mt at the Asian close Sept. 30, down 25 cents/mt from the preceding session.

The M1-M2 intermonth spread for FOB Singapore 0.5%S marine fuel swaps has averaged at a backwardation of $40.64/mt in September, compared with an average of $36.45/mt in August, Platts data showed.

Europe

Market participants anticipate a tighter October period within the European very low sulfur fuel oil markets despite prices easing in September.

While elevated freight rates and higher European premiums kept the arbitrage out of Europe closed for much of September, market participants noted cargo movement out of the region toward the end of the month.

"There were several arbs from NWE ... so few avails end of Sept," said a trader source.

Structurally, however, the availability of blending components that can be sold into the cracked fuel oil blending pool has improved in the month.

"Blending component issue is a bit easier ... but people still lack [lower sulfur] material," said a second source.

A lower feedstock pricing environment has also added to the increased availability of VLSFO product across Europe.

The M1-M2 inter-month spread for marine fuel 0.5%S FOB Rotterdam barge swaps averaged at a backwardation of $15.08/mt in September, down from an August average of $23.25/mt, Platts data showed.

Meanwhile, the front-month VLSFO crack was assessed at 2 cents/b Sept. 30, down from $6.93/b month over month.

Americas

Volatility in the underlying swaps market, driven by similar movements in the upstream crude futures market, led to significant price variation in bulk USGC marine fuel 0.5%S prices in September.

Platts, part of S&P Global Energy, assessed Sept. 10 USGC marine fuel 0.5%S bulk pricing up to $755/mt, before declining to $688.50/mt by month's end.

A US fuel oil source cited an abundant 0.5%S supply in the USGC, as freight rates discouraged arbitrage exports to other regions, while another source said Europe's market levels were driving USGC pricing. "Europe normally sets 0.5% levels," the second source said.

"Anything that's here is stuck here, you can't get it out. ... Demand is irrelevant," a third source said, referencing the high freight costs to move product out of the region.

In the US Gulf Coast derivatives market, the 0.5%S VLSFO/Brent crack swap recorded its weakest level in six months in September, with the prompt-month VLSFO swap averaging an $8.96 premium to the corresponding Brent swap, only slightly above the $8.65/b level in March.

The weak crack helped limit the increase in the outright price of the VLSFO swap, compared with the rally in Brent crude oil futures. While the prompt-month ICE Brent contract rose 9.33% last month to a Platts assessment of $103.51/b on Sept. 30, the USGC VLSFO swap increased by only $1.71% to $104.25/b.