(S&P Global Platts, 8.Feb.2019) — US sanctions imposed on Venezuela’s state-owned PDVSA could further support an already tight high sulfur fuel oil market in Europe, sources said.
The European fuel oil market has seen unusual strength this winter, and could feel a further pinch as traders eye shipments to the US to compensate for the loss of Venezuelan supplies.
US Gulf Coast refineries, geared to run heavy sour crude such as that from Venezuela, are seeking alternative heavy feedstocks, including high-sulfur straight-run fuel oil for secondary units.
Venezuela is a major fuel oil exporter to the US. The South American country exported 6.325 million barrels of fuel oil to the US Atlantic Coast in 2018, according to EIA data, and this loss from the market has already lent support to USGC HSFO prices. At the end of January, the USGC HSFO discount to Brent crude reached its narrowest since September 2009, reaching $3.01/b on Tuesday 29 January, Platts data show.
“I think that [the sanctions] could create some tightness,” a trader said. “If US refineries cannot get their sour crude from somewhere else, then they’ll have to import high-sulfur straight-run from Europe. In that case, we could see some tightness arise.”
A US refiner last week purchased a high-viscosity Russian M100 fuel oil cargo, a less common trade flow.
Only 260,000 barrels of fuel oil were exported from Russia to the US Atlantic Coast in 2018, compared with 2.65 million barrels in 2017, US Energy Information Administration data showed, as higher Russian fuel oil prices discouraged flows to the US. Russian refinery upgrades have dramatically reduced fuel oil production in recent years.
The fuel oil market in Europe has been unusually strong this winter. Demand from Singapore and Saudi Arabia has increased on profitable arbitrages, exacerbating falling supply as a result of lower Russian exports and refinery upgrades in Northwest Europe in preparation for the International Maritime Organization's tighter marine fuel sulfur cap in 2020.
The front-month March 3.5% FOB Rotterdam fuel oil barge crack traded on ICE Friday afternoon at minus $3.4/b, slightly down from an all-time high of minus $3.27/b on Tuesday, the highest since the assessment began in June 2006.
Medium sour Russian Urals crude could also head to the US Gulf Coast, though Urals traders had mixed views as to the viability of the arbitrage, with some citing competitive alternatives from nearby Colombia and Brazil.
Changes in trade flows in the fuel oil-rich heavy sour crude market would have a knock-on affect on the HSFO market.