New York — European fuel oil markets move into the fourth quarter amid continued uncertainty, as COVID-19 restrictions within Europe ramp up again, posing questions about upcoming demand and refinery margins.
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Register NowEuropean refineries reduced runs during the third quarter due to poor margins, which resulted in a lack of fuel oil availability across all grades in Europe during September.
As a result, the front-month 0.5%S FOB Rotterdam barge crack continued to strengthen to end the month of September, reaching a near six-month high of $5.110/b, the highest since March 31's $7.015/b assessment.
The 0.5%S marine fuel market was previously awash with supply after COVID-19 hit global oil demand. While the supply glut appears to have eased somewhat, demand has yet to completely recover.
Combined fuel oil stocks in the Amsterdam-Rotterdam-Antwerp hub in the week to Sept. 23 sat at 1.390 million mt, according to data from Insights Global, down from 1.533 million mt July 1.
Furthermore, reduced refinery runs have led to a shortage of feedstocks being produced such as LSVGO and LSSR, further constraining availability.
With a tight availability of blending components jet was heard to be entering the 0.5%S marine fuel blending pool on the back of coronavirus severely disrupting long-haul air travel. This led to kerosene being blended into the diesel pool, with some also blended into marine fuels, a highly unusual outlet.
The Hi-5 spread -- the differential between 0.5%S and 3.5%S FOB Rotterdam barges -- widened toward the end of the third quarter as an indication of tight supply support. The spread was assessed at $59.25/mt July 1, widening to $70.75/mt Sept. 30. The spread was at its lowest point on June 4 at $38/mt.
This however was still a far cry from the record for the spread set Jan. 3 when it was assessed at $321.50/mt, shortly after the implementation of IMO 2020.
Meanwhile fundamentals for 3.5%S fuel oil were not seeing any major change going into the first half of October, one source said. "Supply is very low and remains low," the source added, also noting that the US Gulf Coast was still showing demand for coker feedstock.
"There isn't much supply of HSFO for Q4," another source said, adding that HSFO was also seen heading to North Africa to meet utility demand.
As for the 1%S fuel oil market, sources expressed difficulty in securing the product into the 0.5%S marine fuel and petroleum coke blending pool.
Supply focus for bunkers
It is no surprise that year-on-year global bunker demand has dropped in 2020, as the coronavirus pandemic remains the main reason for weakness in the global oil complex. While prognoses, of course, vary, much of that demand collapse has already happened, analysts say.
Global fuel oil demand – including bunker fuel – was expected to drop 6.3% on the year in 2020, the International Energy Agency said in September. While the director of the International Bunker Industry Association, Unni Einemo, said in September IBIA members estimated a drop of between 7% and 17% for global bunker demand.
European bunker suppliers said in Q3 that demand remained below pre-coronavirus levels but picked up during the last month.
Meanwhile, bunker prices have mirrored steadied crude oil prices amid a tentative recovery in demand. S&P Global Platts Analytics expects crude prices at $44/b by the end of the year.
While demand and prices have stabilized in recent months, attention has shifted to dynamics on the supply side.
Limited availability for high sulfur fuel oil in the Mediterranean has resulted in its relative price strength, putting renewed pressure on the differential between itself and 0.5% marine fuel. The spread reached all-time lows at Gibraltar on Sept. 10 at $10/mt, having soared as high as $346/mt in late December.
By contrast, VLSFO tightness in Northwest Europe has resulted in the spread between itself and HSFO remaining more resilient to the squeeze -- hovering around $50/mt since mid-March.
Feedstocks fail to lift off
Any prospect of a revival for fuel oil feedstocks has been plagued by setbacks throughout Q3 due to downstream constraints, including reduced refinery runs and weaker bunker demand, the two traditional homes for the products.
The start of the quarter saw limited buying demand for vacuum gasoil as refinery runs remained constrained, still recovering from the glut in refined products such as gasoline caused by national lockdowns. One source noted at the time that "FCC demand is nil, zero -- barrels can only go into the bunker pool, and bunkers are very weak." This poorer demand in the marine fuel pool also hindered any potential recovery for both LSVGO and LSSR.
These lower run rates were to have a second, delayed impact on feedstocks, as the reduced output of residual components has since left the market tight for blending components.
In the final month of the quarter, there was a notable price divergence between the two sulfur VGO products, which hit a three-month high of a $1/b spread in mid-September, as LSVGO saw limited support from the bunker pool and improving gasoline crack. HSVGO demand weakened as margins for secondary units such as hydrocrackers, which traditionally produce middle distillates, came under pressure from an oversupply of gasoil. As such, the HSVGO differential to Brent ICE Futures fell more than $3/b from July 27 to Sept. 28.
Russian duty changes
Russia has amended the rules for applying an export duty on fuel oil, although the changes are not likely to affect export flows.
With the new regulation Russia's government is closing a loophole under which heavy residue with high aromatics content has not been taxed as fuel oil, sources said.
Russia equalized the export duties on crude oil and fuel oil in 2017, in a bid to make fuel oil exports less lucrative and prompt refineries to speed up their modernization and reduce their fuel oil output. Fuel oil production has been declining over the past few years though somewhat plateaued last year.
The expanded base for levying the fuel oil export duty is not expected to have a major impact on export flows as the loophole has only been used by smaller producers, traders said.
The closure of the loophole would impact the economics of smaller refineries, but many of them have already been running at reduced rates due to weak demand on export markets.
Separately, Russia's parliament, the Duma, has approved an amendment to the tax code revoking the excise duty on fuel oil. The excise duty was due to be enforced from April 1, and in early March some producers started offering fuel oil including the new tax, which resulted in the price more than doubling. However, subsequently producers started offering excise-exempt fuel oil with higher aromatics content.
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October 01, 2020 at 07:24PM
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OIL QUARTERLY: European fuel oil markets mixed on COVID-19 impact - S&P Global
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