Elevated crude and component prices are distorting the HSFO/LSFO balance in ways the market is only beginning to appreciate.
As the price of crude oil and all its refined subcategories have risen — and remained elevated — so too have components, not least the products used for sulphur cutting.
Ordinarily, fuel oils that do not exceed 1.1%-1.2% sulphur have the opportunity to take the elevator down and join the 0.5% pricing market.
If components are too expensive though, that osmotic membrane remains hermetically sealed.
To add insult to injury, it is a 40/60 blend ratio in the component’s favour, so we are a million miles away from that being a viable option at our disposal.
Normally, what gives ‘The Big 5’ their advantage in the Fuel Oil market is superior price awareness on components.
But when this arbitrage is so emphatically shut — as is the case now — it puts everyone on much more even footing.
You would have thought that if anyone could make the economics work, it would be the Russians.
Some of their Black Sea HSFO sits around 1.2% sulphur and alongside a robust flow of VGO.
However, most Russian VGO inventory globally is high sulphur — around 1.4%-1.8% — and therefore useless for carrying anything from 1.2% down to 0.5%.
Eastern Russia is better in this respect, with significantly more 0.1% VGO available.
Our 3.5% HSFO market is likely much larger than we think, as its floor may now effectively be 0.6%-0.7% rather than 1.1%-1.2%.
In turn, the 0.5% LSFO market is probably far thinner than most realise.
Hence the continued obsession with refining Heavy Sweets, where the crack remains highly favourable.
But competing for those barrels against sovereign states like China — or increasingly against monoliths like Reliance, who are now also chasing Dar Blend — is an impossible task.
They simply swallow the barrel whole, with the 0.5% by-product never to be seen again.
As and when there is a deal between the US and Iran — which would of course involve lifting sanctions as a means of taking the steam out of the oil price for Trump — Platts will move in lockstep with the legal changes, just as it did alongside the JCPOA in 2016.
Within 48 hours, this was their announcement, effectively capturing the entirety of Iranian 3.5%-4.5% fuel oil inventory:
“Effective immediately, Platts will consider bids, offers, and transactions for Iranian-origin oil products in its assessment process for Middle East and Asian benchmarks, following the lifting of nuclear-related sanctions on January 16, 2016.”
The HSFO/LSFO crack spread makes sense.
The HSFO/LSFO diffs, not so much.
