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Outlook 2019: European fuel oil market to remain strong amid tight supply

London — The European high sulfur fuel oil market will head into 2019 supported by the solid demand from buyers east of Suez and ongoing reduction in supply that have underpinned values for much of this year.

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Further out, pricing will depend on exactly how the shipping industry acts to implement the International Maritime Organization's lower global sulfur cap on marine fuel of 0.5% in 2020, down from 3.5%.

More immediately, ongoing extensive refinery upgrades in Russia -- to create higher value products -- and Northwest Europe -- in preparation for IMO 2020 -- have hit output of fuel oil.

That has come at a time when Saudi Arabia has become a big buyer of HSFO in its hot summer months for power generation and year-round for its desalination needs, and also as Singapore has been buying large quantities of fuel oil for the bunker market.

That has left European intermonth fuel oil swap spreads backwardated throughout 2019 and relative strength in 3.5% FOB Rotterdam barge cracks for most of the year.

That was a result of the expected robust demand for HSFO as shipowners will hold back on purchasing 0.5% product until the end of the year, before they have to contend with the expected hefty premiums that better quality distillates and 0.5% fuel oil will carry.

Suppliers were expected to start building up stocks of 0.5% fuel oil from late Q3 and newly installed coker capacity will be run hard as 2020 approaches to produce enough distillates, at the expense of heavy residues, continuing to tighten the HSFO supply complex.

Backwardation in Europe has kept inventories low and made storage economics unappealing, meaning some companies with storage contracts have not renewed their leases for 2019. The sell-off of tankage in Europe will likely exacerbate the tightness in the market, a prop for prices.

HSFO storage economics do not improve until around Q2 2020 when contango returns as supply outweighs demand.

The Singapore fuel oil market is also relatively backwardated, with the supply of fuel oil stocks at the port around the 20 days mark.

Consequently Europe will likely have to continue to have to ship HSFO to Singapore until close to the end of 2019.

Much of the product that has sailed from Europe in H2 2018 has been directly from the Baltic on Suezmaxes as traders move to capture the strong backwardation in Singapore and avoid storage and blending costs in the Amsterdam-Rotterdam-Antwerp hub.

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That trend was not expected to change.

The low sulfur fuel oil complex,meanwhile, will likely be stronger than 2018 as 1% fuel will not only be required by Mediterranean utilities but also as a blendstock in 2019 to produce 0.5% fuel oil.

That new demand for 1% blending and testing will likely begin to escalate at around the same time as peak summer demand for 1% fuel oil arrives for air-conditioning. As a result, competition for European cargoes is likely to rise.


The bunker market has seen reduced operations this year on the part of two major Mediterranean suppliers and with preparations for IMO 2020 looming, 2019 may also pose challenges.

Macoil, which previously accounted for approximately half of supply at Gibraltar and Malta, was not offering at either of the ports mid-December.

Aegean, which had been a big supplier at Gibraltar, Las Palmas and Piraeus, filed for bankruptcy protection in the US in November and was offering notably less material on the spot market for a period, and only at the first two ports. It has ramped up volumes recently.

S&P Global Platts will start assessing fuel oil with a maximum sulfur content of 0.5% for barges at Rotterdam in January, in preparation for IMO 2020. That will be followed by marine fuel bunkers assessments from July.

Those will reflect growing interest in the bunker market for new low sulfur fuels. Those fuels, including low sulfur marine gasoil, are due to account for around half of bunker fuel demand in 2020, according to S&P Global Platts Analytics.


Reduced output has become the defining feature of Russia's domestic fuel oil market as refineries continue upgrading. Monthly output has been well below that seen in 2017 and likely to edge lower in 2019 as several new units come online at refineries.

Taif's deep processing complex was expected to become fully operational after several glitches and the Orsk refinery was due to launch a third vacuum distillation unit. The new Euro+ complex at the Moscow refinery was due for launch in early 2019.

At the same time 2019 could see less demand for bitumen, which has been shifting capacity away from fuel oil over the past two years in the run-up to soccer's World Cup.

Meanwhile, Russia's dwindling fuel oil exports has seen terminals reduce handling fees but also, in the case of the Novorossiisk fuel oil terminal, to apply and get an approval for a project to change to handling light products.


The European feedstocks market will likely remain weak through the early stages of the new year as refineries in Europe and the US Gulf Coast -- the key export destination for European feedstocks -- will likely continue to show little interest amid deteriorating margins.

European diesel demand was expected to ease along with consumers' interest in diesel cars in favor of gasoline-powered units.

Looking to IMO 2020, vacuum gasoil was expected to be a major blending product in the creation of compliant bunker fuel.

The lower sulfur cap will massively increase the value of a whole range of blend components, including VGO and low sulfur straight run due their higher density specification.

However, blending opportunities for feedstocks into the 0.5% bunker pool will likely depend on product cracks values.


--Edited by Dan Lalor,