LSFO struggles with supply overhang despite strong Urals market, bullish LSSR
The strength in demand for Russia’s medium sour Urals crude has had a contrasting effect on the availability of low sulfur bottom-of-the-barrel products, dampening demand of low sulfur fuel oil but boosting that of low sulfur straight run.
Typically running heavier sourer crudes would produce more high sulfur fuel oil, giving refineries more of an incentive to import lower sulfur oil products.
However, LSFO has come under pressure recently as refiners started processing a sweeter crude slate as a relatively wide Brent/WTI spread encouraged an influx of US sweet crude to Europe. The Brent-WTI was last assessed at $6.85/b Wednesday, compared with $4.58/b this time last year. LSFO is a byproduct of sweet crude when processed in the crude distillation unit.
Overall supply of US sweet crude imports has grown this year so far, with more refineries running grades such as WTI Midland as a base load crude, with expectations this will continue to encourage increased flows of US sweet crude into Europe going forward.
In recent months the 1% LSFO market has failed to maintain a strong premium over 3.5% fuel oil, due to the pressure of refiners running hefty volumes of low sulfur crude, increasing the production of 1% fuel oil, and supply has simply outweighed demand in the first quarter of 2019, a trend expected to continue into the second quarter.
The market has turned to 1% as a blendstock for the European 0.5% fuel oil market as refiners have begun to offer their 0.5% marine fuels to shipowners ahead of the International Maritime Organization’s reduction of the sulfur cap for marine fuel from the current 3.5% sulfur to 0.5% due to come into force in 2020.
Sulfur value spreads in crude oil directly affect the fuel oil hi-lo spread, which measures the premium of HSFO over LSFO, an indicator used by refineries to set their run rates.
Demand in the LSFO market in Northwest Europe has remained fairly sluggish due to ample product availability in the region despite the surge in demand from refineries for heavier sourer crude slates, which would typically reduce the output of LSFO, and in turn strengthen its premium over HSFO.
Tight availability in the sour crude market since the start of the year stemmed from a confluence of factors, including OPEC production cuts and the reduction of Iranian and Venezuelan crude exports as a result of US sanctions.
Ample availability of LSFO depressed the physical hi-lo spread — the premium of 1% FOB NWE cargoes over 3.5% FOB Rotterdam barges — which was last assessed at $2.75/mt Wednesday, down from values seen in mid-March of $9.50/mt.