The front-month January Singapore 380 CST HSFO swap crack against Dubai swaps slipped back into negative territory post touching record highs late last month amid easing signs of supply tightness in the market.
The sharp correction in fuel oil cracks is bearish for medium-heavy sour Middle Eastern grades that have benefited from the strength in residual margins in recent weeks.
The January 380 CST Singapore HSFO crack against Dubai swap on Wednesday stood at minus 53 cents/b as of 4:30 pm Singapore time (0830 GMT), according to data from S&P Global Platts. The same crack spread on November 21, had reached an all-time high of $3.94/b, supported by supply shortages in the market, Platts data showed.
The last time the crack spread flipped into positive territory was in 2012, following which it has been in negative territory for more than six years.
The crack swap slipped into positive territory again on October 25, 2018 and has been positive for around one and a half months, Platts data showed.
Signs of easing supply tightness which was witnessed over the past couple of months has been a strong reason for the cracks to lose some of their gains, market sources said.
This has also caused the closing of the arbitrage window to ship barrels from Europe to the East.
The January 180 CST Singapore HSFO crack against Dubai swap has also lost some its record high gains seen late last month to close at 3 cents/b on Wednesday, according to Platts data.
Sellers are also trying to clear stocks owing to a backwardated market, with the balance December/January timespread remaining steep, trade sources said.
"People are trying to clear off cargoes as much as they can due to the backwardation now and also before the year ends, hence there is some competitive selling seen in the market," a fuel oil trader said.
In addition, more arbitrage cargoes have been arriving in Singapore since late November, building fuel oil stocks. Singapore's commercial stockpile of residues rose 4.8% week on week to 19.838 million barrels December 5, latest data released by Enterprise Singapore showed.
The stocks were last higher on June 13 at 20.113 million barrels, the data showed.
Meanwhile, the downstream bunker demand was slow owing to a seasonal lull at the end of the year, according to bunker fuel suppliers and traders.
"Supply is no longer as tight as November while buying inquiries seem to have slowed compared to last month," a bunker fuel trader said.
BEARISH OUTLOOK FOR MIDDLE EASTERN GRADE
The correction of fuel cracks into negative territory is a bearish signal for medium-heavy sour Middle Eastern crude grades, which had earlier found support from strong fuel cracking margins.
Demand for the Middle Eastern Dubai grade in December is likely to remain muted with a narrowing EFS spread further adding pressure.
The February Brent/Dubai EFS rose to a six-week high of $1.95/b on December 10, Monday, but has since retreated to $1.66/b as of 0430 GMT during Asian trading hours on Wednesday, Platts data showed.
Traders said the sudden spike in the spread was likely due to hedging activity, and arbitrage for fuel oil rich crude grades remained closed to Asia.
The spread between ICE Brent futures and Dubai swaps represents the competitiveness of Brent-linked crude grades to Dubai-linked barrels. A wider spread between the two implies better value on Dubai-linked grades, but a narrower spread, typically under $3/b, makes it viable for European crude sellers to bring their cargoes to Asia.
However, rising freight rates to North Asia has limited crude arbitrage into the region from the US or Europe so far, sources said. If freight rates continue to rise, flows into the region would be likely decline, they added.
