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Europe’s Fuel Oil Traders Wary Of Closing 2019 Deals

Refineries

Traders in Europe are not rushing to the 2019 tenders for fuel oil, expecting wild price volatility in the prices of both high-sulfur and low-sulfur fuel oil next year as the market will be preparing for the new International Maritime Organization (IMO) regulation capping sulfur content in the fuel powering ships.

Although discussions about the tenders for 2019 supply have started and the delivery period for 2019 would usually run between December 2018 and January 2020, some traders are worried that their contracts will be exposed to the price volatility, S&P Global Platts reported on Wednesday.

The delivery period for 2019 contracts would coincide with the January 1, 2020 start of the new IMO rules on using only 0.5-percent sulfur fuel oil on ships, unless said ships have installed the so-called scrubbers—systems that remove sulfur from exhaust gas emitted by bunkers.

According to S&P Global Platts and to market expectations, the price of 1-percent low sulfur fuel could jump next year as it could make a good blend stock for making IMO-compliant 0.5-percent sulfur fuel. On the other hand, the price of the 3.5-percent fuel oil is expected to plunge in 2019 amid plummeting demand from shipowners who will have opted not to install scrubbers but use the 0.5-percent fuel oil instead.  

This expected volatility in both 1-percent fuel oil and 3.5-percent fuel oil prices are discouraging some traders from locking in contracts for 2019.

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Earlier this month, S&P Global Platts expected that reduced supply and possible winter demand from Saudi Arabia could leave the European fuel oil market tight in the winter months, bucking the trend of a more balanced supply-demand picture in winter.

But this year, Russian exports of fuel oil are down, because some refineries are upgrading to change their product slate to lighter and more valuable products ahead of the IMO’s 2020 regulation. In addition, Exxon’s refinery in Antwerp, Belgium, is expected to cut supply of fuel oil this month, as it will also be reducing heavy fuel oil production and boosting output of lighter and more valuable products, additionally tightening supply this winter.

On the demand side, Saudi Arabia will cut fuel oil use for power generation, but it typically increases desalination activities in the winter, so it could draw demand for fuel oil from Europe, according to S&P Global Platts.

By Tsvetana Paraskova for Oilprice.com

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