Reduced supply and possible winter demand from Saudi Arabia could leave the European fuel oil market tight in the winter months, bucking the trend of a more balanced supply-demand picture in winter, according to S&P Global Platts.

The Fuel Oil 3.5% FOB Rotterdam Barges Futures are still in a very strong backwardation—the market situation in which front-month prices are trading at a premium compared to prices further out in the future—a sign of a tighter and undersupplied market.

The 3.5% fuel oil, with high sulfur content of 3.5 percent, usually flips to the opposite of backwardation—contango—pointing to oversupply, in the months November to February, when the market de-stocks for accounting purposes for the end of the year and when demand for fuel oil for power generation in the Middle East declines.

But this year, Russian exports of fuel oil are down, because some refineries are upgrading to change their product slate to lighter and more valuable products ahead of the 2020 regulation by the International Maritime Organization (IMO) to use only low-sulfur fuel oil to power ships. The 3.5-percent high-sulfur fuel oil, however, can still be used after 2020 on ships that have or will have installed the so-called scrubbers—systems that remove sulfur from exhaust gas emitted by bunkers.

Exxon's refinery in Antwerp, Belgium, is expected to cut supply of fuel oil this month, as it will also be reducing heavy fuel oil production and boosting output of lighter and more valuable products, additionally tightening supply this winter.

On the demand side, Saudi Arabia will cut fuel oil use for power generation, but it typically increases desalination activities in the winter, so it could draw demand for fuel oil from Europe, according to S&P Global Platts.

The fuel oil market in Northwest Europe was expected to remain tight in October, due to higher exports from the region to other destinations and to the new unit at Exxon's Antwerp refinery limiting fuel oil supply, traders told Platts last week.

By Tsvetana Paraskova from Oilprice.com
Image from unplashed.com
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