USGC high sulfur fuel oil prices remain weak while Russian M100 fuel oil floods market

 

Prices for US Gulf Coast high sulfur fuel oil have remained weak for May relative to next-month 3% sulfur fuel oil swaps, as heavy imports of Russian M100 fuel oil this month and a lack of incremental arbitrage opportunities in the Americas or to Singapore weighed on the spot market. Fixed prices, however, have stayed fairly strong given the recent oscillations in front-month NYMEX light sweet crude futures between $68-$74/barrel in May.

In April, 3%S prices were steeply backwardated relative to next-month 3%S paper, with physical prices supported by ample HSFO exports to Singapore. This trend quickly reversed in early May, when the lofty April prices attracted up to 5 cargoes of Russian M100 straighr run and cracked fuel oil into the USGC/Caribbean. For most of May, physical prices for USGC 3%S have ranged between $0.30 and $0.60/barrel below June (next-month) 3%S swaps.

At the same time, Mexican utility demand for 3%S has shrank considerably due to cheaper natural gas prices and adequate hydroelectric capacity, enough to where Pemex shifted its crude slate to run more Isthmus and limit domestic fuel oil production, sources with PMI, Pemex's trading arm, confirmed in late April. When utility demand for residual fuel oil rises in Mexico, the country usually takes in several 3% cargoes a month from the USGC.

Demand for bulk HSFO from bunker marketers has also been anemic for May, adding to the weak sentiment in the USGC HSFO market. The recent addition of ExxonMobil to the Houston retail bunker market has kept prices from rising in line with NYMEX crude and USGC 3%S, squeezing margins for bunker marketers.

However, the contango between spot 3%S and June 3%S swaps contracted slightly this week to about $0.10-$0.15/barrel, dipping below monthly storage costs and potentially eliminating any incremental spot demand based on favorable contango economics. This is still fairly weak for the 3%S market in 2006, as spot 3%S traded above next-month swaps for most of January through April.

Created: May 26, 2006

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