Very-low sulphur fuel oil (VLSFO) prices in northwest Europe have returned to a discount against the front-month Ice Brent crude futures contract for the first time in almost four months, as rising supply east of Suez curbs eastbound fuel oil exports and continued Opec+ supply constraints support crude values.
VLSFO barges loading in northwest Europe moved to a 22¢/bl discount to front-month Ice Brent on 4 September, according to Argus assessments, the first time they have closed below crude futures since 16 May. The discount has since widened to 83¢/bl at 16:30 BST today. That compares with average premiums of $4.76/bl in August and $1.84/bl in July.
European VLSFO margins have come under pressure from difficult-to-work eastward arbitrage economics, driven by rising supply east of Suez. Kuwait's KPC is resuming VLSFO exports from its 615,000 b/d Al Zour refinery this month, issuing tenders to sell about 120,000-140,000t for loading on 9-10 September. The firm did not offer any VLSFO cargoes from Al-Zour last month following unstable production and an increase in domestic consumption.
The rise in Kuwaiti exports is weighing on Asian demand for European product. No fuel oil departed northwest Europe for Singapore in the week to 4 September, according to Vortexa data, whereas nearly 125,000t was exported on the route in the previous week. The front-month east-west swap contract was trading at a one-month low of $40/t on 5 September. And the premium of a second-month VLSFO cargo swap in Singapore to a prompt-loading fob northwest Europe barge narrowed by $15.50/t from 4 September to $30.25/t today, also a one-month low.
Compounding the effects of rising supply east of Suez is lacklustre demand for VLSFO in Europe, according to market participants. Furthermore, a fall in European gasoline margins is bolstering regional VLSFO supply. Eurobob oxy barges in northwest Europe were marked at a $25.24/bl premium to VLSFO fob barges on 4 September, the narrowest premium since 10 August. Weaker gasoline margins reduce the incentive for refiners to run blendstocks from the VLSFO pool in fluid catalytic cracking units, potentially increasing VLSFO supply.
The other key factor weighing on VLSFO margins in Europe, and oil product margins in general, is the strength of crude. Front-month Ice Brent jumped above $90/bl for the first time since mid-November earlier today, buoyed by the news that Opec+ heavyweights Saudi Arabia and Russia are extending their voluntary crude supply cuts until the end of the year. Macroeconomic factors, including the US adding more jobs than expected in August and signs that the country's inflation may be easing, have also lent support to crude values.
