Backwardation in the Northwest European high sulfur fuel oil market soared to a near five-month high Thursday as the 3.5% FOB Rotterdam barge physical premium to the front-month swap hit $6.00/mt.
The last time it was as high was April 4.
Traders said this was due to large arbitrage volumes to Asia, which have cleared oil from the region.
"The arbitrage [to Singapore] was open, everyone's moved oil," one trader said. "We were looking last week when the arb was opened, but we struggled to find oil."
Shipbrokers have recently reported a flurry of Suezmaxes on subjects for loading fuel oil from Northwest Europe to Asia for late August/early September dates.
Meanwhile, the front-month/second-month 3.5% barge swap moved to a $3.50/mt backwardation Wednesday, the widest since October 3, 2013, Platts data shows, after having traded largely range bound since June.
"There are some flows East, but also think some short covering taking place," a swaps trader said.
"I think [the recent strength in 3.5% barge swaps] is on the back of Singapore and recent arb activity, as well as low liquidity and the month-end rollover.
August/September is pricing strong so people don't want to stay short," a second swaps trader said.
The European LSFO derivatives complex moved into backwardation Wednesday for the front two months on the steepening HSFO barge backwardation, having traded flat or contango since July 15.
The 1% FOB NWE cargo and 1% FOB Rotterdam barge swaps both moved into a $1.50/mt backwardation between September and October Wednesday, having traded flat Tuesday.
However, the market remains long LSFO in Northwest Europe, where depressed demand and large sweet crude runs at regional refineries have left a glut of oil that saw the physical hi-lo -- the differential of 1% FOB NWE cargoes to 3.5% FOB Rotterdam barges -- crash from $62/mt on May 23 to a 2014 low of $0/mt on August 8 and the lowest since August 2, 2013, Platts data shows.
"There's been no real change fundamentally [in the LSFO complex], the move is due to the rally on [HSFO] barges ... some of the overhang is clearing in LSFO but demand remains very weak," a trader said.
The physical to front-month swap differentials for both LSFO barges and cargoes both remain in contango.
Physical barges were assessed at a $1.75/mt discount to the September swap, while physical cargoes were assessed at a $1.25/mt discount, Platts data shows.
Refinery production of LSFO is expected to sustain recent volumes in September, with sweet crude margins still favorable over sour grades, sources said.
"There's usual refinery production... sweet crude margins on the prompt are better than sour so no real change detected in the production pattern over September so far," a second trader said.
This is expected to cap the physical hi-lo's upside potential going forward, the trader said.
