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Four-month hangover from Singapore fuel oil party finally ends

Friday, August 5, 2016 - 17:58
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Singapore's long hangover from a near-record fuel oil trading binge in March is ending as tonnage traded that month and held offshore moves into landed tanks, signalling a tighter market in the world's biggest trading hub for the shipping fuel.

[SINGAPORE] Singapore's long hangover from a near-record fuel oil trading binge in March is ending as tonnage traded that month and held offshore moves into landed tanks, signalling a tighter market in the world's biggest trading hub for the shipping fuel.

The excess floating storage taken up in March is now virtually empty. With fuel oil supplies coming into Asia expected to remain low because of inventory declines in Europe STK-FO-ARA and strong seasonal demand from the Middle East, onshore stocks are also expected to fall, while prompt values for the bottom-of-the-barrel product improve. "We are poised for some tightening of supplies in the East and that's why we're seeing some recent strength across the near-term time spreads," says Nevyn Nah, oil products analyst at Energy Aspects. "It also appears Western supplies are tightening, as is reflected in the fuel oil barge swaps, and the run cuts in Europe further denting supply will serve to limit the availability of replacement barrels," Nah said.

It took the market four months to end-July to digest the near-record 5.72 million tonnes of fuel oil that traded in March, with a very large crude carrier (VLCC) used for storage unloading 230,000 tonnes of the industrial fuel last week.

The DS Valentina, the last of at least 24 vessels chartered by Glencore or its shipping arm ST Shipping to store the commodity giant's 3 million-tonne share of the March trades, transferred its fuel oil cargo to Singapore's Universal Terminal storage facility on Jurong Island by July 27, shipping data in Thomson Reuters Eikon showed.

Glencore declined to comment on its trading operations. "Floating storage around Singapore is now looking pretty thin and the arbitrage window is still firmly shut, so we're more than likely to see notable draws of Singapore inventories, potentially leading to a backwardated market over the near-term," said a Singapore-based fuel oil trader.

A market characterized by falling inventories will tend to see its market structure flip from contango, where future deliveries are more expensive than prompt cargoes, into backwardation, in which an immediate sell-off makes more money than waiting for later sales.

Reflecting the falling inventory expectations, the average front-month time spreads for 380-centistoke fuel oil narrowed to minus-83 cents in July, from minus-$2.89 for June. The August time spread has shed some of those gains, averaging minus-$1.25 so far, but touching minus-50 cents a tonne over the past two sessions.

While Singapore onshore fuel oil inventories rose by 112,000 barrels in the week to Aug. 3, less than half the capacity of a medium-range handymax vessel, the stocks are still down more than 4 million barrels from a record hit in the week to June 1.

REUTERS