Global fuel oil markets are tight. Demand, while sluggish, has only been met by drawing down stocks in ARA and Singapore. The culprit is supply, which has remained low in most regions. Record fuel oil output in the Middle East ex Iran has gone to meet domestic demand. Western arbitrage inflows have arrived more slowly than initially expected. With the Asian imbalance between inflows from the West and demand set to continue in Q2 14, fuel oil values will remain supported by tight stocks since it will take time for rising Western supply to arrive in Asia. Stronger Asian pricing will ensure a floor remains under European high sulphur fuel oil as well.
Asian fuel oil markets will be supported in Q2 14 by refinery maintenance and shutdowns in Japan. Japanese bunker suppliers are emerging as new import customers. Idemitsu Kosan expects to start importing bunker fuel to the site of its Tokuyama refinery, which shut in March. Other bunker sellers have warned customers of tighter supply in the coming months in Tokyo Bay.
Middle Eastern fuel oil markets likely hold the key to the next three to six months for prices worldwide. After posting strong demand for fuel oil during a winter cold snap, the region's big consumers are expected to report double-digit gains in fuel oil demand once cooling demand increases with warmer temperatures. Lower exports from the Middle East to Asia go a long way in explaining the tightness in Asian fuel oil markets and if volumes remain low this will be a significant supportive factor for prices.
However Iran looks to be quietly increasing exports of its prized low density fuel oil. Shortages of low density blendstock have been a key factor behind recent strength in lower density fuel oil relative to higher density grades in Asia since H2 13. However exports of fuel oil of a similar specification to Iran's main export grade from the UAE port of Fujairah surged this month. If sustained, this level of exports would put heavy pressure on the Asian viscosity spread, which rose above $9/tonne for April amid fears of tight supply.
US Gulf Coast HSFO prices are under pressure due to higher than normal stocks, one of the few regions of the world where supply is in relative abundance. While exports to Europe are not yet viable, traders are eyeing the widening differential. With European and Russian refinery maintenance expected to peak in April, arbitrage shipments of HSFO from the US Gulf to ARA cannot be ruled out although Asian destinations are more likely. Meanwhile, Mexican fuel oil demand continues to decline sharply, positioning the country as a major exporter of fuel oil going forward. Consumption declined to less than 0.1 mb/d in February, a fall of nearly 0.15 mb/d.
European low sulphur fuel oil has lost some support from buying by US East Coast electricity utilities as cash natural gas prices have declined. European supply, however, remains challenged due to refinery maintenance, disruptions to Libyan light sweet crude oil output and lower imports from Brazil. Margins for producing LSFO have surged in recent weeks prompting European refiners to switch crude slates towards heavy sweet crude, such as Angolan Pazflor, suggesting refiners see value in LSFO going into the summer.