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Analysis: Seasonal dip for European fuel oil hits but overall strength persists

London — European high sulfur fuel oil premiums have begun to slide as the arbitrage east has closed, but the market remains far stronger than previous years given the OPEC production cuts, refinery upgrades and an increased thirst for fuel oil from Saudi Arabia.

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The European HSFO market experienced a counter-seasonal bull run during Q4 2018 on an active arbitrage to the east as Singapore premiums for fuel oil soared at a time where refinery upgrades were being introduced to limit the production of HSFO.

However, the 3.5% FOB Rotterdam barge structure on the forward curve has now softened to more typical levels for the winter season.

The January-February intermonth spread was last bid and offered on ICE Friday morning at $1.5/mt and $2.5/mt respectively, compared with an assessed level at $6.75/mt on November 23, when the fuel 3.5% FOB Rotterdam barge crack also peaked, pricing above lighter products such as naphtha.

Premiums for the front-month 3.5% FOB Rotterdam barge crack contract reached as high as minus $3.44/b at the end of November, according to S&P Global Platts data, when fuel oil demand in Europe and Singapore outstripped falling supply from Russia and amid ongoing refinery upgrades in Europe.


The global crude complex has crumbled over the last few months as supply began to outweigh demand, resulting in the extension of the OPEC-led production cuts.

Energy ministries from Saudi Arabia and the UAE on Wednesday said that the oil market is on its way to rebalancing and that the 1.2 million b/d supply cut by OPEC and its allies will be sufficient in the first half of 2019.

OPEC crude output fell 630,000 b/d in December to a six-month low of 32.43 million b/d, according to the latest S&P Global Platts OPEC production survey released Tuesday.

Typically cheaper heavy sour crudes are the most impacted by the production cuts, as refiners favor the production of lighter more expensive grades. As the production of sulfur rich crudes is curbed, this will likely tighten the supply of high sulfur fuel oil, a by-product of the crude refining process.

As a result refining margins for refining fuel oil will likely increase, resulting in an upward movement of the 3.5% FOB Rotterdam barge fuel oil crack. The fuel oil crack for the second quarter of 2019 was last assessed at minus $7.96/b Thursday, compared with a discount of $9.86/b this time last year.


Through 2018 and 2019 extensive refinery upgrade programs in Russia and Northwest Europe have tightened the fuel oil complex.

Despite the prompt weakness in 2019, the 3.5% FOB Rotterdam barge forward curve remains positive through 2019 compared with assessed levels this time last year, when the intermonth spreads priced at discounts through to April 2018.

The more dominant backwardated structure for 2019 is largely down to a tighter fuel oil complex as refinery upgrades have been introduced in Europe, including ExxonMobil's delayed coker at Antwerp, in a move to produce higher volumes of distillate product at the expense of fuel oil, in preparation for the International Maritime Organization's 0.5% global marine sulfur cap to be introduced on January 1, 2020.

As upgrade programs continue to develop and limit the production of HSFO this will likely strain the HSFO market, particularly as summer approaches.

Saudi Arabia has become a major buyer of cheap HSFO in its hot summer months for power generation and year-round for its desalination needs.

The kingdom drew some 4.2 million mt from Europe over May-August 2018, according to data from Platts trade flow software cFlow. This comes as an additional strain to the standard global bunker requirements.

--Eleni Pittalis,

--Tamara Sleiman,

--Edited by Alisdair Bowles,