The backwardation in the 3.5% FOB Rotterdam barge market has continued to steepen despite rising fuel oil exports from Russia in May and June, underpinned by strong refining margins and record high fuel oil cracks.
The July/August structure of 3.5% FOB Rotterdam barges traded in a backwardation of $3.25-3.50/mt at the beginning of last week and stood at $3.75/mt Thursday, despite increasing production of fuel oil from both European and Russian refineries.
Russian fuel oil exports in May rose 11% on the year and 5% on the month to 3.587 million mt, data from the Central Dispatch Unit, the energy ministry's statistical arm, showed. Exports rose year on year from the low levels of 2016 but also as output was rising.
Production of fuel oil, a key Russian export product, totaled 4.492 million mt in May, up 4.7% on the year and 2.6% on the month, according to energy ministry statistics.
While the year-on-year rise in May was also due to the low base of last year's production, the trend is expected to continue and according to one fuel oil trader June fuel oil exports are also marginally higher month on month.
Fuel oil exports from Russia have been boosted recently by refineries returning from maintenance and healthy cracking margins giving refineries the incentive to increase output. Strong fuel oil cracks, which have reached their highest mark since 2003, pushed refineries to increase runs.
In addition, Russia's river navigation season, which this year runs against a backdrop of high water levels, has provided additional export routes.
But traders are starting to see some potential cracks in the current strong market.
"The North paper looks a bit tight," one trader said, adding that the market has been overdone and should ease if the arbitrage to the East remains closed. The East-West arbitrage serves as an indicator of the strength or weakness of Europe's HSFO market, typically strengthening when the arbitrage is open.
With also plenty of fuel oil and increasing flows from Russia, "it could be a little weaker," another trader said.
Meanwhile, cash barges have kept a premium to front-month swaps since the end of May, with the premium assessed at $1.75/mt for the last two days.
BULLISH SENTIMENT
The entire fuel oil complex is facing a mix of bull and bear views, but the bulls seem to be on the winning side for now, with cracks still elevated. July cracks continue to trade in the region of minus $4/mt, the highest in over five years, according to the Intercontinental Exchange.
Venezuela, a significant producer of heavy fuel oil, is said to have cut production amid political instability there, according to traders.
In April China saw received no fuel oil from Venezuela, once a major supplier of mostly 380 CST fuel oil, data from S&P Global Platts showed.
The South American country has experienced refining issues of late, with the 955,000 b/d Paraguana Refining Center (CRP) in northwestern Venezuela increasing its capacity slightly at the end of May but still operating at 46%, according to state-owned oil company PDVSA.
Additionally, the potential shutdown of several Venezuelan ports is said to be further dampening fuel oil exports to Europe and Asia, providing an upside for cracks.
RUSSIAN PORTS SEE DECLINING EXPORTS
But despite the slight reversal of previously falling exports in the last few months, Russian fuel oil exports have been overall diminishing as refineries increase their depth of processing and also in the aftermath of the latest step in the tax maneuver that equalized export duties on crude oil and fuel oil from this year.
"Fuel oil output is lower because processing is down," a Russia-based trader said. "We see how the reduced production has affected export volumes."
Reduced processing has primarily affected large but less complex refineries, which can't run fuel oil through secondary units and cut runs as a result, which incidentally affects their gasoline production too.
Mini-refineries have increased runs as they produce mostly non-finished grade products used as feedstock for further processing, but many of them process gas condensate, which doesn't yield fuel oil.
Further exacerbating the shift in production patterns, the quality of Russia's fuel oil has changed and the upgraded refineries have increased output of cracked fuel oil.
Market players also note that while fuel oil output has diminished, there has been an increase in other heavy products, such as VGO, gas condensate and distillates.
Russian ports, which have been relying on healthy fuel oil export volumes, have been affected.
Ports in the Baltic Sea are now operating at full capacity, but can't secure the necessary volumes, a port source said. "The market situation has changed, fuel oil is less," the source said.
There have been unconfirmed reports that ports are offering discount transshipments in order to attract higher volumes of fuel oil.
