High-sulphur fuel oil (HSFO) remains strengthened further, with its prompt intermonth timespreads surging into steep double-digit backwardation, from week-ago levels; despite an easing of geopolitical tensions in both Venezuela and Iran.
The prompt February/March spread for the high-sulhour 380-cst grade, which moved into balance-month at the start of February, hit a 12-month high of nearly $20/mt in backwardation on Feb. 3, rising inexorably from a contango structure since Jan. 7. It averaged at $8.79/mt since Jan. 7, surging from an average of $2.48/mt in contango between Oct. 16 and Jan. 6.
This is despite easing threats of a US military strike on the Islamic Republic, following President Donald Trump’s announcement that he was hopeful of a deal will be struck to limit its nuclear ambitions, with talks expected later in Turkey.
In response, global crude benchmarks fell sharply, dropping from above $70/bbl to around $65/bbl in just a single trading session.
It should be noted that there have been no disruptions to Iran’s fuel oil or crude exports so far.
Likewise, in Venezuela, with the US having effectively taken over their crude exports, the oil supply situation appears to have stabilised, though there has been no news about its fuel oil supply situation.
Venezuela’s fuel oil exports have fallen drastically since sanctions were first imposed in 2019, well below its pre-sanctions peak of 3-4 VLCCs per month, to less than one per month since Jan 2020, with the last direct-arrival parcel of 140,000 mt landing last December.
Most of the Iranian and Venezuelan cargoes have arrived indirectly onto floating storages offshore the Singapore trading hub and ended up in either China, as feedstocks, or Singapore, as marine fuel.
Despite the surge in HSFO’s timespreads, premiums for ex-wharf 380-cst marine fuels remain weak, averaging at just 92 cents/mt from Jan. 7 till Feb. 3, weaker vs the Oct 16/Jan 6 average of $1.95/mt, signaling that the paper market has distorted from its physical counterpart.
This signals that the prompt market remains well-supplied, as demand, both from the Singapore marine fuels and China feedstock markets have been lacklustre. There are sufficient HSFO supply, including Iranian and Venezuelan cargoes, in storage.
It may well be a case that the strong forward paper market is a result of pricing agendas, and it is likely that a correction will occur when the February 380-cst contract expires at the end of the month.
Signalling this, the March/April timespread have eased from a peak backwardation of $6.21/mt to $4.64/mt in the past 5 trading sessions, though stronger levels of under $2/mt before Jan. 22.
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