March 16, 2016 / 9:26 AM / 4 years ago

Fuel oil play yields near-record volumes in March, discounts flip to premiums

SINGAPORE (Reuters) - Singapore, the world’s top bunkering port, is in the midst of its first big fuel oil trading play since mid-2015, with nearly the same handful of traders buying and selling huge volumes of the shipping fuel, setting up wide swings in prices and spreads.

Vessels pass an oil refinery on Pulau Bukom in the waters off the southern coast of Singapore in this February 26, 2016 file photo. REUTERS/Edgar Su/Files

The current wave of trading opened in late February with Russia’s Lukoil, France’s Total and private merchant Gunvor [GGL.UL] aggressively selling down the market by offering steep discounts on fuel oil.

Since the beginning of March, though, Chinese oil major PetroChina and Swiss-based commodity merchant Glencore have been snapping up near-record daily volumes, with 620,000 tonnes of fuel oil changing hands on March 9, boosting time spreads and physical cargo premiums for the 380-centistoke (cst) grade. [FO380SGSDMc1] [FO380-SIN-DIF]

The trading activity has pulled the fuel oil price curve into backwardation, with prompt prices higher than those further out, implying tight supply for immediate deliveries. Yet Asia’s fuel oil market is well supplied in the short-term, with Singapore inventories at record levels. [O/SING1]

“Market fundamentals don’t justify a near-term backwardated market,” said Tushar Bansal, senior consultant at Facts Global Energy (FGE).

In coordinated physical and derivative dealings, traders often support financial positions by buying or selling fuel oil on Platts’ Market-on-Close (MoC) price assessment process, which sets the benchmark prices for most of the crude oil and petroleum products traded each day in Asia.

A total of 3.48 million tonnes of fuel oil have been traded on the MoC system over March 1-15, more than the total volumes traded between December and February, industry data shows.

Glencore accounted for 57 percent of the volumes traded so far this month, fixing at least half a dozen and as many as 15 tankers, according to data collected from ship and fuel brokers as well as traders.

PetroChina took up almost a third of the fuel oil purchases.

BULLS CHASE BEARS

The aggressive buying by Glencore and PetroChina directly follows strong selling in late February by Lukoil, Gunvor and Total, in what traders say is this year’s first big battle between buyers and sellers in Singapore’s fuel oil market.

Over February, 1.184 million tonnes of fuel oil were traded in the MoC pricing process, with most of the deals coming in the second half of the month.

The selling pressure by Lukoil, Total and Gunvor saw front-month time spread discounts for 380-centistoke (cst) fuel oil widen from $2.50 per tonne on Feb. 16 to $3.50 the following day. [FO380SGSDMc1]

Once Glencore and PetroChina started their aggressive buying in March the 380-cst prompt month time spreads flipped into a premium above $2 a tonne, while April-May spreads strengthened from a $3-$4 per tonne discount range to around $1-$2 this week, a Singapore trader said. [FO380SGSDMc2]

Storm clouds gather over an oil refinery in Singapore in this January 30, 2016 file photo. REUTERS/Edgar Su/Files

The fuel oil volumes traded over the MoC system so far this month are the largest since June last year, when record volumes of nearly 6 million tonnes were dealt. That month a daily record of 726,000 tonnes involving 28 deals was also set.

Glencore and Gunvor declined to comment on their trading activity. Total, PetroChina and Lukoil did not respond to emailed requests for comments.

“We have seen increased activity in fuel oil, and other refined products since the start of 2016,” said Calvin Lee, senior manager for Asia Price Group at Platts.

Reporting by Roslan Khasawneh; Editing by Henning Gloystein and Tom Hogue

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