The Singapore high sulfur fuel oil market has continued to remain in relatively stable backwardation during April despite persistently weak fundamentals, Platts data showed Thursday.
In March, the 180 CST prompt time spread briefly turned negative and the 380 CST prompt time spread was flat, but since that point both spreads have remained firmly positive.
The prompt time spreads rebounded to positive levels with the 180 CST prompt time spread at an average of $2.57/mt and the 380 CST prompt time spread at an average of $3.04/mt over April 1-12.
Prior to these past few months, the market structure had been considerably more volatile for a year, with the 180 CST prompt time spread ranging from $2/mt to a peak of $17/mt in December 2011. But in the last two months it has remained below $5/mt.
Previously, the prompt time spread for 180 CST fuel oil swaps closed at minus 35 cents/mt March 9, the weakest the prompt time spread had been since December 29, 2010, when it closed at minus 49 cents/mt, while the prompt time spread for the 380 CST grade closed flat on March 15, the weakest it had been since December 28, 2010, when it closed at minus 6 cents/mt.
Backwardation, where prompt months trade at higher values than forward months, is generally seen as evidence of a strong market. So the backwardation seen in fuel oil suggests that there has been some support for the market.
There has been some steady buying during the Platts Market on Close assessment process since February with the two biggest buyers being Brightoil and BP.
As of late Thursday, Hong Kong-listed trading company Brightoil bought 305,000 mt of 380 CST HSFO for April loading during the Platts Market on Close assessment process.
Brightoil also bought 240,000 mt of 380 CST HSFO for March loading during the MOC, after buying no cargoes for February loading.
Separately, BP has bought 300,000 mt of 180 CST HSFO for April loading, besides 20,000 mt of 180 CST HSFO for March loading during the MOC.
Meanwhile, in the over-the-counter derivatives markets, Brightoil bought 430,000 mt of 180 CST April outright swaps and 280,000 mt of 380 CST April outright swaps, and BP bought 480,000 mt of 180 CST April outright swaps and 215,000 mt of 380 CST April outright swaps.
The purchases come despite a fundamentally weak Singapore HSFO market with high flat prices dampening demand from the bunker market and fuel oil stocks remaining at over 20 million barrels since the week ended February 22. Residual fuel stocks also hit a near two-year high for the week ended March 28.
When Brightoil and BP started their buying in February and March, respectively, trade sources said many market participants believed that prices would strengthen. That was in part due to arbitrage arrivals for April forecast to be lower than average at around 2.5 million-3.0 million mt, as compared with the average monthly arbitrage volume of 3 million-3.30 million mt in 2011.
However, while supplies have been relatively low coming into April, the market has remained weak due to low demand resulting from relatively high flat prices.
Even so, the buying interest has given some support to the weak market, market sources said.
Brightoil continued to bid during the MOC this week, although BP has started selling.
"[Currently], the demand scenario remains bleak and the arbitrage volume continues to grow with May at more than 4 million mt and June's volume building fast. It feels like a bit of economic slowdown in China with high domestic gasoil stocks muting teapot demand," said a trade source.
