The fuel oil physical hi-lo -- the premium of 1% FOB Northwest European cargoes over 3.5% FOB Rotterdam barges -- came off a 17-month high Tuesday morning, having surged $12.75/mt to $62.75/mt Monday on fears Russia may stop or reduce gas supplies to and through Ukraine, traders said.
Concerns Russia will use exports to Ukraine as geopolitical leverage saw LSFO prices soar on speculation of a demand spike in the event of a gas shortage in European markets. Ukraine is the conduit for an estimated 143 billion cubic meters of Russian gas annually to Europe.
Russia, through state-owned integrated gas company Gazprom, last shut off supply to Ukraine in 2009, for its failure to repay debt.
Stopping Russian gas supply via Ukraine would strain an already tight LSFO market in which refinery maintenance, lower sweet crude runs, and outflows to South America and the US have left Europe with a dearth of spot cargoes and several shorts still to fill for March. However, with this year's mild European winter meaning gas stockpiles are higher than in 2009, price moves have been speculative.
"Fear is the driver," a trader said, while another said: "Until we see a clearer picture of how it plays on the diplomatic front it is all speculation. But you would be a fool to be short [LSFO]".
The swaps market also reacted strongly. The March hi-lo swap traded as high as $61/mt Monday after BP demonstrated significant buying interest.
The British major bid for five LSFO cargoes in the Platts Market On Close assessment process, four FOB basis Antwerp and one CIF basis Milazzo. A few minutes before the bids were floated the March hi-lo market stood at $51/mt bid and $58/mt offer, before pushing higher.
The March hi-lo swap was eventually assessed at $57.50/mt, but by Tuesday morning was trading back around $50/mt.
"The different crude slates {run by refineries] means there is not a lot of product for March," a trader said.
The delivered Rotterdam bunker fuel hi-lo premium was assessed by Platts at $69/mt Monday, the highest since April 10, 2012, when it was $71/mt. Bunker participants said demand far outpaced low sulfur bunker availability, with suppliers able to offer prompt in four days time.
