Bitumen's prospects for the year ahead again look weak in Europe, where road budgets remain under pressure.
Even in a year that saw a wave of plant closures, bitumen supply was never close to being tight in any major European market in 2021, and premiums to high-sulphur fuel oil (HSFO) were historically low. This trend looks likely to continue, with production levels enough to cover demand, a lack of arbitrage opportunities to outside the region, and road project and maintenance budgets crimped by the cost of dealing with Covid-19, although essential work will continue.
The boost given to bitumen margins in 2020, when feedstock prices plummeted, is long gone. This past year other product prices have rallied, but bitumen has not in relative terms.
The crude rally could run out of steam as Covid continues to bite hard and consumption of some products stays subdued, although into the summer this should rebound seasonally. HSFO got a boost in 2021 from higher prices for natural gas, and was particularly in demand east of Suez as a feedstock for power generation.
But if the oil-price optimists are right and crude prices make further headway, then bitumen prices will be carried along.
Outright bitumen pricing will become more significant and more widely offered in the year ahead. Historically, bitumen has been priced against HSFO in European cargo export markets, but this is becoming less desirable because of the recent disconnect — fob Spain cargo differentials to fob Mediterranean HSFO cargoes fell from $45-50/t premiums in June to $2-3/t discounts in mid-December — and the products' different market fundamentals.
Bitumen's relationship with HSFO will disconnect further in 2022, but high premiums for the former seem unlikely.
So in 2022 major buyers like Algeria's state-owned Sonatrach will offer an outright price as an option in import tenders, together with Argus bitumen differentials to Mediterranean HSFO cargoes. At least one northern European constructor has already agreed a large chunk of its term purchases for the year on a fixed price basis, using crude and/or fuel oil formulas to arrive at those values.
Any further disconnect between HSFO and bitumen pricing could encourage a fresh move away from HSFO-related pricing. Term contract talks for next year's supplies have underlined the difficulty of linking bitumen prices with HSFO values.
More closures of bitumen-producing refineries are on the way, after TotalEnergies, Portuguese firm Galp and Finland's Neste permanently closed their respective Grandpuits, Porto and Naantali plants in 2021, but even this will not create a particularly tight market. Terminal owner VTTI is to close its bitumen-producing ATPC refinery in Antwerp, Belgium, likely early in 2022. Trading firm Vitol, which supplies feedstocks to and markets bitumen from the refinery, says "it anticipates no disruption to its customers and will source product from its global network". In practice this will mean it will move more cargoes from the well-supplied Mediterranean region to its customers in northern Europe.
Also adding to the supply picture will be sizeable Russian bitumen availability. Russian Baltic bitumen exports in the first 10 months of this year were around 300,000t, according to vessel tracking data, far outstripping 90,000t in all of 2020. These flows next year are likely to be at similar levels to 2021 as infrastructure improves at Baltic Sea ports, with further investment likely.
