The low sulfur fuel oil market might be headed toward a supply glut which may mean the restart of sales into the high sulfur pool, sources said, after the Med-North differential crunched to its narrowest in 18 months.
FOB Mediterranean LSFO cargoes have fallen to their lowest premium over FOB Northwest Europe cargoes in 18 months of $3.25/mt Friday, the lowest since August 2014, according to Platts data.
Low sulfur market participants were caught by surprise by narrowing differentials, which were happening because of a sharp drop in UK Continent-Mediterranean freight rates over the previous week.
UK/Continent to Med dirty Handysize freight was assessed at $12.02/mt Friday, its lowest since Platts began assessing the route in 2003.
On a Worldscale basis, the route was assessed at w107.50, its lowest since October 19.
"Med-North is usually not very volatile," a trader said Monday.
However, at the current level of around $3/mt, "either premiums [in North West Europe] have to come off, or Mediterranean players need to give more value" to attract flows.
A second trader said that that might encourage more Med sourcing of LSFO.
"You will certainly see less oil moving from the North" if Med-North remains at current levels, "so we will see the Med tighter," a third source said, adding that utility demand was still strong. The first source also said that another trend that might arise is that selling into the high sulfur barge market could become attractive again, if the trend continued.
Sales of low sulfur materials in the high sulfur pool had been seen in the first part of 2015, after LSFO plummeted to a discount to HSFO on more restrictive environmental limits for sulfur content in ship fuels in NWE, where the market for 1% fuel oil shrank.
However, LSFO rebounded to a premium against HSFO in the second half of 2015. That premium had narrowed again at the beginning of 2016, but was back up to around $2-$4.50/mt the previous week on pockets of utility demand remaining in the Mediterranean.
That had led sources to have contrasting views on whether selling low sulfur materials in the high sulfur market was viable. One source said some volumes had been sold through February, while another source said that with the hi-lo so high LSFO would no longer enter the HSFO pool.
However, with the recently volatile Med-North spreads, the economics might be set to change again in favor of such sales.
