ARA bunker market tightens amid backwardation

Bunker grade high-sulphur fuel oil (HSFO) supply has tightened in the Amsterdam-Rotterdam-Antwerp (ARA) refining and storage hub in northwest Europe as backwardation in the swaps market reached its widest on record this week ahead of the International Maritime Organisation's (IMO) 0.5pc sulphur cap.

Multiple bunker suppliers faced HSFO shortages and said this could persist until next week. One bunker supplier said it had prompted regional refiners to answer as to when they would resume supply, but was told that it would not receive bunker fuel oil until 13 September. The bunker supplier will then load at a jetty and expected to supply shipowners by 16-17 September.

While bunker fuel oil supplies will be dry until at least next week, marine gasoil (MGO) can be supplied in 2-3 hours from the order, a bunker supplier said.

Rotterdam barge swaps reflected the spot tightness in the market. The premium of September barge swaps to the October product reached $44/t on 9 September, the widest since 1993 when Argus started assessing prices. Delivered bunker premiums in ARA reached $12/t today against Rotterdam barges.

As the price of HSFO is expected to drop significantly towards 2020, storage economics for the grade have been rendered unviable. HSFO volumes in storage continue to fall, and supplies are tighter. Some companies have started storing IMO-compliant fuel oil and blending it into product in the past few months.

Fuel oil inventories in ARA rose by 7pc in the week to 5 September to 1.3mn t, the highest total since January. But the increase could be driven by higher storage of 0.5pc sulphur fuel oil ahead of 2020.

The falling trend in HSFO refinery output has also weighed on supply in Europe, because of the weaker fuel oil margins and companies ramping up low-sulphur production. Fuel oil output in the EU-16 fell by 10pc on the year in January-July to 1.11mn b/d, according to provisional Euroilstock data.

Rotterdam barge prices did not reflect the shortage in the delivered market, and HSFO margins against Ice Brent crude futures remained near their weakest in five years. The Rotterdam barge discount to Ice November Brent narrowed to $16.40/bl today from $18.23/bl yesterday. Recovering global fuel oil stocks probably drove margins down, after falling inventories pushed cracks to their firmest in five months earlier in July. Companies closing paper positions ahead of 2020 may have weighed on notional fuel oil cracks, according to market participants.

HSFO shortages in northwest Europe came after a similar situation last month in Singapore, the world's largest bunkering hub.