The 3.5% fuel oil crack for November strengthened Monday on a strong Singapore market as Iranian sanctions have left the high sulfur fuel oil market with fewer cutterstocks used for blending to produce on-spec product, traders said.
"Iranian sanctions remove a decent amount of lowish density from the market, making blending more problematic," a trader said Monday.
Looming US sanctions on Iran, due to go into force on November 4, threaten to take a large chunk of global oil supply out of circulation, with the market watching closely to see which countries will follow the US' lead and shun Iranian crude.
This shortfall in Iranian barrels has already tightened the Singapore bunker fuel market, while traders also mentioned declining exports from Venezuela and Mexico.
The surge in demand from Singapore to make up the shortfall has seen huge volumes of European cargoes shifted east, and as a result has tightened the availability of cutterstocks and generated premiums.
"The cutter market is really strong, and it's tight," a second trader said.
Cutterstocks are typically lighter petroleum liquids such as light cycle oil (LCO) used in blending to reduce the viscosity of grades such as Russian M100 and generate on-spec European bunker fuel.
"[The tightness in] Asia is more sanctions-related, then by domino effect Europe is impacted as well," the first trader said.
The lack of cutterstocks is bad news for Russian refineries offering M100, as the latter becomes less competitive in this situation. Demand for M100 has been strong over the last six weeks due to an active arbitrage east, with many Suezmax cargoes loading directly from the Baltic ports and sailing east, avoiding the usual route to storage in the Amsterdam-Rotterdam-Antwerp hub, to maximize the price gain from the heavily backwardated Singapore market.
The November fuel oil crack -- the spread between 3.5% FOB Rotterdam barges and front-month Brent crude futures -- was assessed at a multi-month high of minus $7.22/b to Dated Brent Monday, up from minus $7.57/b on Friday. The front-month fuel oil crack was last seen higher at $7.18/b on July 31.
Another headache for blending economics is backwardation. A backwardated fuel oil market puts further strain on blenders as a key blending requirement is to be able to hold oil in tank. The cost of storage, which does not pay for itself in a backwardated market, puts an additional squeeze on blending margins.
The 3.5% FOB Rotterdam barges last bid on ICE for the October/November intermonth spread at $6/mt, and last traded at $7/mt for November/December.
