The FOB Singapore 380 CST high sulfur fuel oil cash differential slipped into a discount Monday due to excess supply.
The cash differential for the higher viscosity grade fuel oil fell to a discount of 26 cents/mt Monday, down from premium of $1.39/mt Friday. It was last assessed at a discount on December 24 at minus 39 cents/mt, Platts data showed.
The Singapore HSFO market has been hit by weak sentiment since a slump in freight rates opened the floodgates for Western arbitrage cargo heading to Asia.
Assessed freight rates on the Rotterdam to Singapore VLCC route have hovered around a four-month low of $4.25 million lump sum since early last week, down from near two-year highs of $5.8 million lump sum reached late January, data showed.
Traders expect Asia to receive a significant inflow of Western arbitrage fuel oil for March and possibly April due to the sinking freight rates.
"The key point really is that freight has collapsed, and that means [Western] arbitrage is now wide open," a trader said. "I think we are probably looking at anywhere upwards of 5.5 million mt of fuel oil to arrive East in March."
This compares with just under 3 million mt of Western barrels estimated to arrive in Asia in February and a monthly average of around 5 million mt in recent months.
Traders have also pointed to weak demand from China as a possible reason for the market to turn bearish.
"We did see a lot of buying from both Korea and China in the December-January period, but China [demand] has been rather quiet after Lunar New Year," another trader said.
Traders said the market appears long, based on a narrowing intermonth time spread at the near end of the curve for both 180 CST and 380 CST HSFO swaps.
The prompt intermonth 180 CST HSFO swap spread, which was assessed at $1/mt Monday, was seen offered at the same level at 0600 GMT Tuesday, while the April/May 180 CST HSFO swap spread, which was assessed at $1/mt Monday, was seen offered at 50 cents/mt at the same time on the ICE OTC market.
The cash differential for FOB Singapore 180 CST HSFO slipped to a seven-week low of 57 cents/mt Monday. It was last lower January 8 at 25 cents/mt, Platts data showed.
The cash differential for physical fuel oil represents the price buyers are willing to pay for oil above or below benchmark values published around the day a cargo loads. A firming cash differential indicates growing appetite from buyers and is typically accompanied by a strengthening of the forward curve structure.
