Asian fuel oil prices were weighed down by aggressive offers by Western trader Glencore and sliding crude levels, but the cracks improved, signalling concerns over medium-term supply tightness. Glencore sold three cargoes totalling 60,000 tonnes of 380-cst to refiner BP and one to Projector for early-May loading.
Prices for the 180-cst grade dipped $8.62 to $338.75, while its differential held firm at $6, as traders eyed thin Western fuel oil arrivals for May, amid looming demand from China, the Middle East and Southeast Asia as valid support.
The physical fuel oil differential to sour crude improved 68 cents was valued at $10 a barrel. "I think it is becoming more and more evident that the arb flows from Europe and the Caribbean in May is going to be a little tight, that is going to keep the market buoyed unless we hear otherwise," said a Singapore-based fuel oil trader with a Japanese trading firm.
Western arbitrage arrivals for May are estimated to be around 1.2-1.5 million tonnes, down about 40 percent from April levels. Middle East demand for power generation is also expected to pick up with the coming summer months.
"Typically, the requirements for the Middle East are higher in the summer because its hot and you have air-conditioners running and so more demand for power generation, this is nothing new," an Indian based trader familiar with Middle East supply flows said. "But with exports expected to be thinner and demand swelling, the differentials are going to be well supported and so will the cracks if crude keeps easing," the trader added.
And as outright prices start to ease, Chinese demand is also expected to possibly stream in, but traders were a little less willing to make forecasts. "You have prices dropping $8, you think the Chinese won't sit up and take notice?, They are super price conscious, so I wouldn't be surprised, short term, if we see them coming in to work some business," a fuel oil trader said.
An easing ship supply situation for aframax tankers and an anticipated dip in freight rates on the Singapore-Hang-up route could entice Chinese demand, shipbrokers said.
Freight rates for the route were valued at about $675,000, about $15,000 lower than week-ago levels, but rates were expected to drop off further over the next two weeks. "The owners are supporting the market, but rates are about to come off in a big way over the next week or so. However, the window will be really short," a Singapore-based shipbroker said.
Aframax tonnage typically gets drawn into the US Gulf Coast as crude imports increase for lightering operations in America. "I think if you want to book any tonnage, now is the time to go into the market and get it done. This way you can take advantage (of low freight rates) before prices and demand rebound," the shipbroker added.
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