Current Fundamentals and Market Outlook

Hello and welcome to the Patz Oil Markets podcast by SMP Global Energy where today we'll be talking about how the residual fuel oil markets across Europe reacted to the conflict in the Middle East I'm Emma Ketley and I manage the Crude and Fuel oil Price repeporting teeams based in London, and I'm joined today by our fuel oil prrice reporters, Joseph Jaff, Iman Rezig, and Al Bob Welcome, than you all for joining me today So at the start of the conflict and the subsequent closure of the Strait of Hamuz at the end of February, moving into March, we saw huge impacts globally across physical and paper and future markets. initially, we saw global futures markets respond to the loss of supply from the Strait of Hamuz. concerns generally just around this global risk premium That then is filtered into the physical market. We saw the initial physical responses in Asia who were more closely linked to the crudeil flows coming out of the Straital Hormuz. But naturally, that physical response did spread globally and we have certainly seen that across Europe. taking crude oil as an example, is an important indicator All of our products markets globally, plats Dubai reacted much sooner price wise to the loss of the volume coming out of the strait of Hamuz, and we saw highs in March. and then we saw highs in dated Brnt in April where we assessed that benchmark at an all time high on april seventh. So we continue to see those responses across the market. and today we're going to focus in on the residual fuel oil market in Europe how those initial responses were in the market and how things have been evolving since then. So Joseph, I'm going to start with you, if I may, how did the physical fuel markets react at the start of the conflict? Looking at European fuel oil imports from the Gulf They are down ninety five percent for the first half of twenty twenty six compared to the first half of twenty twenty five From a high sulfur fuel perspective, if we time travel back to early March when the conflict first began The initial response from the market was one of uncertainty driven by the potential supply concerns of product being trapped in the Gulf As a result of this uncertainty regarding supply We observed flat prices increase drastically and remain elevated over the last three months High sulfur fuel oel barges in Rotterdam peaking at six hundred and eighty dollars per metric ton on the eighteenth of May However, this flat price encompasses the movement of the underlying crude from which it is made from, which of course was extremely volatile as you just touched on Emma. So if we strip out the volatility in the underlying crude by exploring the crack spread, this can tell more of a clearer picture Following the initial attacks at the beginning of March The front month high sulfur crack reached positive territory, peaking at three dollars twenty seven cents per barrel on the sixth of March. off the back of supply fares in the feed stocks, in the form of sour barrels and high sulfur fuel oil product being trapped in the gulf due to the effective closure of the strait of Hormuz Additionally, the front to second month high solar fuel time spread reached an all time high of forty six dollars seventy five cents per metric ton on march sixth. However, this was short lived as market participants expressed that in reality, the proportion of high sulfur that comes from the Gulf that makes up Europe's supply was lower than anticipated This was once again reflected in the paper market as cracks returned back to negative territory, two trading sessions later and remained in negative territory since Time spreads have since come down too It's also worth noting that the Asian markets were more exposed from a supply perspective than Europe as they observed significant tightness This then altered flows, meaning that the East had to pull product from alternative regions, which would have potentially be bound for Europe, further contributing to more supply concerns for the European fuel o markets From a demand perspective, it was also impacted by this flat price being higher. However, demand remained relatively inelastic as market participants had the opinion that expensive product was better than no product at all And now this would be a good opportunity to hear from Alwa, who explores the bunker market more in depth. How's sort of that bunker demand shifted over the past three months In relation to the bunker market, we have been seeing diverted vessels around the Cape of Good Hope, tightening supply in Africa, which has mainly affected marine gas oil. MGO in Durban has increased by one hundred forty four percent to its pre war high, and it remains elevated due to this demand. Demand was expected to increase as far as Lost Palmers, but it never really materialized While demand was increasing from shifting flows as the war prolongs, demand in Northwest Europe and the med decreased and this was due to buyers delaying purchasing. They were being cautious as they were unsure of the price direction and where the market was heading Many of them were holding out from lifting bankkers until they believed prices would potentially fall. The Red threeI in Waterdim was already keeping demand neuted, but after the Iran war started, it exacerbated the situation We' also seeing the bunker barge spread widen. at the start of the war over two hundred percent from pre war levels. so this was reflecting the risk premium within the bunker market. Suppliers were also dealing with uncertainty around regional logistics, potential disruptions near the Straight formers and also higher insurance and a higher prompt delivery slots. At the same time, ship owners were trying to secure STEMs quickly, often paying for certainty rather than waiting for like cheaper barrels The market was very volatile, so the indications we were receiving by market participants were usually only valid for around like thirty minutes during the first month of the war In some ports we were seeing around like a fifty dollar or more daily increases or decreases, moving sharp intradday moves in icepint and gas oil Thank you both. There's some interesting pieces that you've picked up on there in the physical markets, partarticularly around like buyer behavior as well in periods of uncertainty. We can often see two stark difference in in approaches. You have buyers looking to secure barrels or tons, depending on the market, if they think there's maybe a prolonged period or that concern around supply But similarly buyers start thinking there's a potential for an easing off of prices, you can see the market sit back a little bit. So interesting that we've seen both of those reactions across the board. So Imon coming to you, did all the fuel or sulf ag grade share that same response necessarily. so VSFox cracks rose, times pers widen, but not to the same extent as I solur. peaked around five to six dollars Timespres hit a peak back gradation of forty six dollars fifty cents on april thirtieth, but stabilized thereafter In the context of things, four to five dollars for VS cracks is not extremely high considering that the twenty four average was four and half dollars per barrel Unlike high sulfur, Europe is structurally long in the B LSFo, therefore less reliant on imports of actual fuel oil. So concerns were really centered around access to crude supplies, which in the end never really appeared to be an issue Velus faux is fundamentally a blended product. so typically when fundamentals do become tighter, people blend other streams of oil like fe socks or shale oil into the European Belus faux pool, helping to alleviate any tightness With that said, it did lead to significant shifts in other spreads like the highigh five spread, which widened to multimonth highs across the period of the war Peaking around one hundred dollars per metric ton before narrowing again on april thirtieth This was mainly driven by tighter feed stocks across Europe, leading to blending opponents to be redirected into the feed stock pool and resulting in less product heading to the VLS foool. Thank you, Iman. that ties in really nicely with what Aa was discussing earlier regarding the high five spreads we also saw across the bunker market. So thank you all so far for the wrap up of what we saw over the last few months. Before we finish up, I want to also have a look at how the markets are now. what are the fundamentals in the physical fuel markets in Europe and the paper markets, as we have seen, an evolution of the scenario We've seen the signing of the MOU. We have seen the waivers on Iranian crude oil sanctions. and we've also seen vessels starting to move both out of the strait and empty vessels moving into the strait as well. So while we're not at those pre conflict levels of movement, we are starting to see those ships moving However, of course, tensions remain elevated with conversations around breaking of ceasefires and so on. So Joseph again, I'll start with you. How are you seeing the physical fundamentals today as we're recording on june thirtieth Yes. So from a very low slver fuelil perspective, we have observed robust demand amid a tight supply environment which is in contrast sharply with a bearish high silfver fu oil market. weighed down by ample product availability and poor demand A wave of imports from the West from the likes of Venezuela and the US has contributed to this length, which is being currently felt in the market Looking ahead though, with the European summer well underway, as we have felt the effects of this heat wave here in London over the past week or so Utility demand for cooling purposes is expected to emerge as a fresh demand channel from North Africa and the Middle East This warmer weather has also acted as a catalyst for low sulfur fuel oil demand, so we could see more product moving on the arbitrage from Northwest Europe into the Mediterranean where the shorts are Additionally, the summer season here in Europe brings ideal for road construction and infrastructure activities So we could see more high sulfur fuel on molecules being allocated to bitumen production, which could tighten up the amount of molecules in circulation Nice, and how is the paper markarket looking Ione your paper markets have practically raised their wall premium. so as of june twelfth Pey spreads and volatility measures were returning to pre conflict levels, Notably high silver time spreads entered a contango on june twenty fourth, for the first time since the outbreak of the war, and remained in the structure since june twenty sixth narrowing seventy five cents As of june twenty ninth, the Kango structure remains at a dollar twenty five cents. This shift really does underscore the current bearish fundamentals that we're seeing in the physical market that Joseph touched upon Subdued conditions in the high sulfur market will further reflect in the highay spread. which reverted back to positive territory. Previously, the spread had been trading to a discount high slfur since the onset of the conflict, incentivizing the blending of low sulfur fuel oil into the high slver pool Much of the premium rature was amplified after june fifteenth, as you mentioned Ema, following an initial agreement between the US and the Iran to end hostilities in the Middle East and resume normal transit through the Strait of Oose The formal signing of the peace agreement in Switzerland on june nineteenth reinforced the reopening of the Strait of Armose and signaled a potential return to normalcy So we've looked at know the physical market in terms of the barges and the cargoes and also the paper market hour. Do you have anything to add on what we saw in what we often refer to as that retail market, the bunker fuel market Yeah, so within the bunker market, we have been seeing premiums and flat prices falling. The buying appetite has increased slightly as for those who have waited for lower prices now have the opportunity to take bunkers at a lower level. but we are also seeing people who are potentially waiting for prices to drop further, which has contributed to subdued demand in ports like Rotterdam Supplies across Europe have been mainly sufficient with very little concern. However, as of Monday twenty ninth and the week of the twenty second of june, we were seeing operational issues in relation to high sulfur and very low sulfur. We've also been seeing recent ARbs of zero point five percent out of the region has created some concerns of potential tightness in July These recent.o five Abs have taken products out of Europe leading to very low sulfur flat prices decreasing at a slower rates to high sulfur As a result, high fivees spreads in Northwest Europe and the med have been widening, driven by the bulk market rather than bunker fundamentals. As negotiations do remain on thin ice, the bunker market will remain cautious and cover their positions ahead of weekends and announcement dates againgain, seeing those diffing buying trends across the board. So thank you very much for covering that. All right, well, We've got a lot to keep an eye on over the next few weeks across the European funeral market and beyond. So thank you very much, Joseph, Imanuer for joining me and to you our listeners for joining us on this edition of the Platz Oil Markets podcast