London — The European high sulfur fuel oil market was balanced to tight for much of the second quarter as summer power generation demand from the Middle East pulled material out of the region, while supplies were limited by seasonal refinery maintenance. The situation is expected to persist into Q3, despite the thin fixture list seen from Northwest Europe to Singapore for May, June and July.
The Middle East, principally Saudi Arabia, drew around 1.5 million mt from Europe in May and a similar amount in June, to meet the surge in air-conditioning demand in the region during the summer months, traders said.
This, coupled with a lack of cutterstocks -- which are used to blend down the viscosity in high viscosity fuel oil to produce merchantable RMG 380 CST bunker fuel -- tightened the market from the oversupplied state that characterized Q1 2018.
While Middle Eastern demand is set to remain strong through the summer months, the supply picture in Europe looks likely to shift, with extra cargo volumes set to flow from the Black Sea into the Mediterranean. This is primarily due to refineries starting to optimize their runs as they come back online following seasonal maintenance, with Handysize cargoes also expected from Spain, Italy and Turkey in Q3.
There was some evidence of a longer market at the end of the quarter, with the news that fuel oil stocks in the Amsterdam-Rotterdam-Antwerp hub rose to a record high of 1,614,000 mt as of June 27, according to data from PJK Consulting. According to traders, there was a build-up in stocks due to a lull in NWE-Singapore VLCC fixtures, but the arbitrage was looking more promising for July, with 660,000 mt of HSFO fixed to go from Rotterdam to Singapore as of June 29.
LOW SULFUR FAILS TO SPARK
The low sulfur fuel oil market failed to kick-start summer with the typical gusto seen in previous years, despite the standard spike in air-conditioning demand from the net-short Mediterranean.
The reason for this was oversupply, with Europe's LSFO market under pressure this summer as refiners have processed more sweet crude from the US, which was reflected by a narrower hi-lo spread -- the premium of LSFO to HSFO -- this year than in 2017.
Further length is expected in the market as refineries begin to offer cargoes following the maintenance period, piling pressure onto margins. Additionally the thinner margins for LSFO have encouraged certain Northwest European refiners use LSFO as a feedstock to test new coker units, according to market sources.
SUMMER FAILS TO LIFT VGO LENGTH
The vacuum gasoil market will be looking for increased demand for European VGO barrels -- from both within Europe and the US Gulf Coast -- during the third quarter.
The European market struggled in the second quarter with weak local and US demand, a wide WTI/Brent spread for much of June -- which makes product which prices on a Brent-related basis such as European VGO more unattractive to US buyers -- and increased production from Russia.
Demand was muted largely due to refinery maintenance in the US Gulf Coast, the world's largest importer of feedstocks. As a result, European traders are looking for US refineries such as Valero's Texas City refinery to return to buying VGO rather than selling it, as they did while maintenance was being carried out on their fluid catalytic cracking (FCC) units.
When FCC units are in maintenance, refineries have no use for their produced low sulfur VGO and/or low sulfur straight-run -- produced from the vacuum distillation unit and crude distillation unit respectively -- and also have no need to buy in any extra barrels.
Excess VGO and LSSR barrels have been building up in the European market to the point where most have been heading into storage, and as a result the focus for the third quarter will be on trying to reduce stock levels in Europe.
With Northwest European refinery maintenance drawing to a close moving into Q3, the LSSR market should see some support after being weighed down by the weak VGO market through June.
MIDDLE EAST DRIVES BUNKERS MARKET
Availability of bunker fuel in the Northwest European market is likely to be heavily influenced by Middle Eastern demand. Product was pulled into the Middle East in Q2 for power generation purposes, a trend which is expected to persist moving into Q3.
However, the recent decision by OPEC and its allies to increase crude production by 1 million b/d will mean greater Saudi Arabian crude production, which could lessen the need for such fuel oil deliveries and thus keep more stocks in NWE.
The summer is traditionally a time of high demand in the Mediterranean bunker fuel market, with cruise vessels and dry bulk vessels taking harvests increasing in number. The Black Sea bunker market is bracing itself for higher demand in the summer months amid an early harvest season in southern Russia and Ukraine.
This season's harvest started in late-June, earlier the usual start of mid-July, and will ramp up as the weeks progress, sources said. Driving the earlier harvest has been persistently dry and hot weather over the south of Russia and Ukraine.
The impact on bunker demand at the Russian Black Sea port of Novorossiisk had already begun to be felt at the end of June and the trend looks set to continue into the third quarter.
RUSSIAN FUEL SUPPORTED BY REDUCED OUTPUT
Russian fuel oil drew support throughout the quarter, with domestic prices, unlike light products, retaining a premium over the export netbacks. Fuel oil has been drawing support from ongoing reduction of output, but that has been exacerbated by the capacity switch, earlier than usual, to production of bitumen.
Bitumen demand surged in the run-up to the World Cup amid large-scale works throughout Russia, and appears to have peaked as the World Cup started, but overall the bitumen season will last at least until October.
Unlike previous years, bitumen prices had been lower than fuel oil prices, as fuel oil prices were also supported by the firmer export netbacks, whereas bitumen prices are not directly impacted by the export netbacks.
Only recently bitumen prices started climbing getting on a par with fuel oil prices.
Meanwhile, the river navigation season started slightly later than usual, on a prolonged cold spell, but is now running in full swing.
