The December/January US Gulf Coast 3% sulfur fuel oil swap spread moved to a wider contango on Friday, while market sources searched for a fundamental reason to explain the movement.
Platts assessed the December/January 3%S spread at a contango of 25 cents/b Friday, compared with a contango of 10 cents/b on Thursday and just 5 cents/b on Wednesday.
The latest change to the spread came comes on the heels of competitive offers in the physical market for USGC 3%S fuel oil on Thursday that pushed the physical-paper spread to 85 cents/b, with the physical product at a discount the December swap. The discount on Friday was 98 cents/b. One USGC trader partly attributed the widening December/January contango to the swaps market "catching up" with the physical fundamentals.
US fuel oil stocks are at their highest since June 2010, US Energy Information Administration data showed Wednesday, and have increased by 5.185 million barrels alone since the week ended September 4.
With freight rates too high to make export opportunities feasible and with a healthy market contango, most purchased USGC fuel oil currently ends up in storage, according to sources. Storage, however, is harder to come by, especially as imports enter with few willing buyers.
Another US broker believed USGC prices need to move to a significant discount compared to competitive markets to open up potential arbitrage opportunities, and to divert imports temporarily while the USGC clears out some of its storage backlog.
Complicating things, the broker added, is that a potential downward movement in the USGC would also put pressure on supply in the USAC, where stocks are also at multi-year highs.
"I can't see how USAC will sustain this premium to the USGC for long. We really can't take more oil now," the broker said. "It's a race to the bottom, and you don't want to be last."
