Cash to paper on high sulfur fuel oil barges slides to 10-month low amid low buying interest
The 3.5% FOB Rotterdam barge price nosedived Wednesday to a 10-month low as the destocking season and weaker buying interest took hold.
The 3.5% FOB Rotterdam barge price was assessed at $331.00/mt Wednesday, while the contango on the physical to the front-month swap plunged to minus 4.25/mt, from minus $2.00 on Tuesday. This is the weakest contango seen since February 1, when value was minus $5.25/mt.
“Two weeks ago the swaps structure was in backwardation; it’s a big slip,” a trader said.
There were only six barge trades during Platts Market on Close assessment process Wednesday, with the majority of interest on the offer side. Typical buy-side players such as Vitol were notably absent from the bid side and were only offering product in Wednesday’s barge MOC. Vitol was unavailable for comment.
November saw the highest volume of barge trades for 2017 at 983,000 mt, but traders do not expect this to be repeated in December.
Nonetheless, this is a typical trend at the end of the year and sources said companies are attempting to shift product out of tanks to run down stocks for end-of-year accounting. Since 2012, December has traditionally seen the physical to paper structure sink into contango; the weakest value recorded in that period was minus $16.25/mt on December 24, 2015.
Destocking occurs to reduce stocks companies have on their official balance sheets to avoid tax impacts as those that can show low inventories and more cash can obtain cheaper credit the following year, sources said. European firms are said to typically use FIFO, or “first in, first out” accounting rules, sources said.
The barge structure is typically supported by VLCC fixtures from Rotterdam to the East; nonetheless, only one VLCC has been fixed for December, the Front Stratus, compared to the usual five seen per month.
Since September only six VLCCs have departed Rotterdam for Singapore, drawing approximately 1.7 million mt from Northwest Europe as the arbitrage has been under pressure.
In comparison December 2016 saw a total of 11 VLCC and Suezmax fixtures to Singapore on a strong arbitrage.
“VLCC rates have been coming off so this may help [movement in December],” a second trader said.
The first trader said: “Maybe the arbitrage can reopen at some stage… barges are so low because there are no arb fixtures.”
In the bunker market falling ICE Brent and crude oil futures applied downward pressure to bunker fuel values in Northwest Europe Wednesday, adding bearish weight to decreasing upstream high sulfur fuel oil barges.
Despite increased selling interest and limited buying interest in the HSFO market, availability of 380 CST fuel oil at Rotterdam is tight for prompt delivery, bunker sources said.
Typically bunker demand ticks up through December to meet Christmas delivery requirements.