The Gulf coast fuel oil to Brent crude spread narrowed to its lowest point in 2017 as sharply reduced inventories supported higher prices on the Gulf.
The value of Gulf coast 3.5pc sulphur residual fuel oil was assessed at nearly 95.5pc of the price of Brent crude on Wednesday, compared to a year-to-date average at around 87pc, according to Argus data.
The narrowing spread has been driven in part by sharply lower fuel oil stocks on the Gulf coast. Over the past six weeks fuel oil inventories have declined more than 27 pc, moving from a 2017-high at 25.8mn bl for the week ending 9 June, to 18.7mn bl for the week ending 14 July, according to US Energy Information Administration data. Current stock levels are at their lowest since January 2015.
Stock draws have been exacerbated by backwardated paper markets that have limited appetite for import cargoes. The Gulf coast high-sulphur fuel oil second-front month swap market moved into backwardation in early July after being assessed in contango throughout most of June, according to Argus data.
While the Gulf coast swaps market forward curve has fluctuated several times this year, the depth of the current backwardation is notable - on Wednesday August swap prices were assessed at a $1/bl discount compared to July. Prior to July, the largest second-front month discount in 2017 was at 39¢/bl in early February.
The deep backwardation in the swaps market has contributed to a feedback loop in which importers are reluctant to bring in new material, intensifying the impact of low stock levels and driving the market further into backwardation.
