First cracked oil cargo leaves Saudi for Europe

CRACKED OIL: Saudi Aramco has sold its first ever cargo of cracked fuel oil. (Getty Images)

Saudi Aramco has sold its first-ever cracked fuel oil cargo to Europe and more westbound flows could take place to meet steady bunker demand, as refiners cut capacity on poor margins, traders said on Wednesday.

The 80,000-tonne parcel of 380-centistoke (cst) fuel oil, for April 18-20 loading from Aramco's Jubail refinery, was sold to a European refiner at a discount of $8.00-$10.00 a tonne to Singapore spot quotes, on a free-on-board (FOB) basis.

"I have never seen such cracked fuel oil cargoes moving West before. It's like a reverse arbitrage, and it's probably because of the capacity cuts," a Singapore-based Western trader said.

"The capacity cuts are driven by weak distillate and gasoline margins and if that leads to a lack of fuel oil, I don't think the refiners are too bothered because it's negative cracks anyway."

The European refiner had also bought a low-sulphur fuel oil cargo from Aden and is expected to co-load both parcels on the same tanker.

The Aramco parcel is expected to be sold into the marine fuels market.

Several European refiners, including France's Total, are expected to cut part of their capacity for good, which would also cut production of fuel oil, due to poor margins and demand.

Total, Europe's largest refiner, will shut 10-20 percent of its overall 1.4 million barrels per day (bpd) of capacity at its eight refineries in France, Germany and the Netherlands shortly, sources had said.

It was not clear when the shutdowns will take place.

"It's not clear how much less fuel oil is going to come out of Europe. There will be definitely less supply to Asia, but for Europe itself, it's too early to tell," another trader said.

Western cargoes, from the Caribbean to Europe, make up the largest source of supply to Asia, the biggest consumer of high-sulphur fuel oil.

Any shortage in Europe that would see cargoes drawn westwards, drastically cuts the global fuel oil pool.

Above-average volumes of Western arbitrage cargoes are estimated for April at 3.5 million tonnes. But flows are expected to fall for May arrivals to below 3.0 million tonnes.

The swaps market has already reacted to the tightening of supplies.

Fuel oil's prompt timespreads have strengthened from week-ago levels. In the past three trading sessions, the April/May contango have been bought up from $4.75 a tonne a week ago to $2.75 by 0400 GMT.

Most of the buyers were physical cargo traders including Total, Glencore, BP and UAE trader FAL Oil although some banks were also covering end-user hedges when crude fell over the past two days.

However, traders said buying interest from Asian players for prompt physical cargoes were muted as the market was presently well supplied while demand from the bunkers market was thinning.

But this could change because of large spare tank capacity and the contango structure.

"I believe the situation will change quite drastically come second-half April, when people realise that there aren't that much supplies coming in," another fuel oil trader said.

"Bunker demand may not improve dramatically, but inventories will still be drawn down with insufficient replenishment. And we do have a lot of spare storage capacity here while the contango will take care of the tankage costs."

Fuel oil's crack spreads have also strengthened across its 12-month forward curve, up 20-30 percent from week-ago levels. It's prompt April value was at a discount of $6.85 a barrel to Dubai crude, the highest in two weeks, at 0400 GMT.

Aramco has been selling larger-than-usual volumes of spot fuel oil in the first quarter, particularly the high-quality straight-run A960 grade, following the shutdown of the hydrocracker at its Ras Tanura plant.

It has sold seven A960 cargoes of 80,000 tonnes each at low prices of between a discount of $1.00 to a premium of $1.00 a tonne to Singapore spot quotes, FOB, well below average levels of $10-premiums. (Reuters)

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