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European FAME 0 hits 2-year low on high stocks; UCOME market bearish

The outright price of European FAME 0 fell to its lowest level in two years Wednesday as stocks continue to build on the prompt and winter demand leaves the market firmly focused on RME, at FAME 0's expense.

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S&P Global Platts assessed FAME 0 at $787/mt FOB ARA Wednesday, down $6/mt on the week.

A weaker energy complex has also had some effect on the market, with front-month ICE gasoil futures at $572/mt Wednesday, down $5.25/mt on the week.

Rising FAME 0 stocks, with SME imports from Argentina continuing, have been further compounded by the contango in the FAME 0 market, encouraging sellers to hold product, with the potential to sell at a greater profit later on.



"The front remains quite depressed and there is a continuing contango structure in the market," said a source. However, others saw the falling prompt as a result of this structure. "FAME 0 is in a carry as it makes sense to hold onto it, but this is boosting stock levels and the curve is falling; it is a very tricky situation at this time," another source said.

This indeed appears to be the case, with the front becoming longer, in turn dragging down the curve, adding further incentive for sellers to retain product, while imports further add to stocks.

"People will try to hold out selling until the second half of March, first half of April when the market can accept more seasonal product," another source said, adding that this was not just a function of sellers holding on stocks, but also that the summer specifications for FAME 0 are not useful at this point for blenders, as Europe is still shrugging off the blanket of snow that fell at the start of the month.

The ramifications for the weaker FAME 0 market can be clearly seen on UCOME prices in Europe, which are experiencing a period of volatility on the back of the FAME 0 price and an unpredictable oil complex.

"UCOME at replacement cost, producers really can't offer lower," said a source, as premiums over FAME 0 continue to rise following movements in the underlying price.

"UCOME is being kept down by FAME 0's low premium to energy and also high stock levels," said another source, adding that producers remain cautiously optimistic despite the recent falling UCOME price, that there will be some upside toward the end of the month.

With the UK's upper house of parliament, the House of Lords, voting Tuesday to raise the Renewable Transport Fuels Obligation as of April, market participants expect this to result in a boost for UCOME, with UCO the largest biofuel feedstock consumed in the UK at 42% of the total consumed.

This should add demand to both of these markets and so the bearish sentiment appears to be retreating somewhat.

However, the weak FAME 0 outright price is still hindering the amount by which these prices can move, with buyers reluctant to bid up if the FAME 0 price remains low. "Some people have high stock levels but won't sell because if they sell spot they will lose their production costs," said a source.

Potential imports of UCOME from China, however, are adding a potential cap to the European UCOME market as, should the arbitrage open, UCOME producers in Europe could see their production margins decline further.

Market sources told S&P Global Platts that Europe could import over 300,000 mt of UCOME from China in 2018.

--George Griffiths, george.griffiths@spglobal.com
--Edited by Jonathan Fox, jonathan.fox@spglobal.com