US Atlantic Coast high sulfur residual fuel oil is likely to weaken soon relative to the US Gulf Coast due to a flow of incoming barrels, sources said Friday.
The New York high sulfur premium should come under pressure as "European high sulfur is coming this way in forms of Russian and refinery RMG," a source said.
The source added the Come-By-Chance refinery in Newfoundland, Canada, should be back around August 9 following a turnaround that began in May.
"High sulfur should be getting much weaker," a second source said. "[There are] so many barrels heading to the East Coast...[the premium] has attracted too many barrels and the market does not support it."
A quarter of the Come-By-Chance refinery's output consists of high sulfur residual fuel oil that is largely exported to New York Harbor and re-blended to lower sulfur specifications for local resale.
In addition to Canadian barrels, "the [European] arbitrage is open...but some Russian M-100 cargoes arrived not too long ago," the second source said.
Also, while unusual, another high sulfur cargo is coming in from the 330,000 b/d Fawley refinery in Southampton, England, sources said.
Platts spot 3%S cargo fuel oil assessments to be delivered in July averaged $99.60/barrel for New York Harbor and $98.10/b for the Gulf Coast, data showed. In comparison, the Platts Northwest Europe 3.5%S spot cargo fuel oil assessment for delivery in June averaged at $94.38/barrel ($599.34/mt) on an FOB basis.
The lack of a liquid paper 3%S market makes US Atlantic Coast to Europe/US Gulf arbitrage calculations imprecise.
However, the front-month 3%S New York Harbor paper premium was pegged in the plus $2.25-4/b range compared to USGC throughout June.
In contrast, the premium on Friday was pegged at $1.40/b for August and September, with sources indicating likely lower Q4-2011 values around $1/b.
The year-to-date spot market premium New York Harbor 3% sulfur residual fuel oil has commanded over its Gulf Coast counterpart has averaged $1.74/barrel, nearly tripling from the 62-cent average premium in the same period last year, Platts assessments showed.
The premium in the last 30 days, however, more than halved to plus $1.38/b from an average of plus $3.07/b in the previous 30-day period.
"The natural level for that spread is about 75-cents to $1.00/b," a third source said.
While the New York premium is likely to weaken, beyond a certain point, it would be difficult, as "USAC is short [high sulfur fuel oil], and even when you import material, you still need to blend to meet lower sulfur restrictions," the source said.
Also, there will soon be incremental bunker demand that would absorb the flow of additional product, preventing the market from weakening too much, the source added.
