The US residual fuel oil hi-lo, the spread between Atlantic Coast 1%S and Gulf Coast 3%S, registered its largest physical and paper drop in six weeks Tuesday as the recent LSFO demand pop subsided.
At the same time, the tightness in the low sulfur market saw some relief with Trafigura sending a 40,000 mt low sulfur fuel oil cargo into the Atlantic Coast from Rotterdam, according to market sources, due to arrive in late January. The February Atlantic Coast low sulfur swap plummeted $2 to $100.25/b, the biggest one-day drop since October 3, when the swap fell $4.05.
The first Phillips 66 cargo sold to Hess at the start of January is due for delivery this week as well, and a LSFO cargo was heard done earlier in the week at a small premium to USAC 1%S as well, signaling "the market is softening some," a regional fuel oil trader said.
Phillips 66 sold another 1%S cargo to Hess at $101.25/b for February 4-8 during the Platts Market on Close assessment process, a 43-cent premium to the 1%S strip. That sale comes just a week after Hess bid the market up to $2.30/b over the strip, further rising supply levels.
That sale saw the cash hi-lo constrict 41 cents to $7.32/b, the lowest it has been since January 7. The move was even more noticeable in paper as the hi-lo swap narrowed for the first time in 12 trading days on news of the cargo, coming in by 65 cents to $6.05/b. This is the largest one-day contraction in the spread since December 5, when the hi-lo narrowed 70 cents.
Despite the drop the hi-lo continues to trade at sharply higher levels compared with 2012 due to the prompt demand from the bunker market. Over the same six-week period last year the hi-lo swap topped at $4.75/b.
Prior to trading action Tuesday it looked like the hi-lo could reach record levels. Through Monday, the spread had widened by $3.25 since December 27 and was at the widest point since September 17, when it was at $6.70/b, according to Platts data.
Weakness in LSFO was more noticeable compared with the current oversupply in the HSFO market in the Atlantic and Gulf coasts, which is beginning to move 3%S cash to a contango structure. A trio of high sulfur cargoes have been heard offered into New York with no bids, while the Gulf Coast saw buying interest transfer to the back of the curve Tuesday.
