Asian FOGO Q4 spread jumps 25% on low fuel demand, Iranian supply prospect

London, (Quantum Commodity Intelligence) - Rising diesel prices coupled with a slowdown in bunkering in Asia has blown out the spread between diesel and marine fuel prices in Singapore with the month-ahead crack differential rising sharply in the past 10 days and throwing hedging positions into doubt.

The price of marine fuel 0.5%, a diesel-based bunkering fuel for ships that do not have scrubbing technology, have fallen sharply relative to the value of crude over the past 10 days – hammered down by overall slumping demand for bunkering fuel.

Meanwhile, at the same time, diesel 10ppm prices – the benchmark for gasoil-based motor fuel in the region – have risen sharply, buoyed by the prospect of European demand and lower Indian supply.

That has left the spread between swaps for the two commodities at above $75/mt for June – 50% up in just 10 days and the highest in more than a year.

The Q4 spread has also risen, hitting $58/mt on Wednesday – up more than 25% over the same time period.

The volatility in the spread – also known as the FOGO – creates a headache for shippers and traders who use 10ppm diesel as a proxy for hedging marine fuel.

With the introduction of IMO rules limiting sulfur emissions from ships last year, the bunkering market has increasingly used marine fuel 0.5% to power ships.

But with little liquidity in that swaps curve, many have used 10ppm derivatives as a substitute, given that marine fuel is a diesel-based product – although one that is blended with much more sulfurous gasoil.

The volatility in the spread is likely to cause a rethink of this strategy as it increases basis risk for those wishing to lock in fuel costs.

The rise in the spread has come about as diesel cracks return to a more normal level as European nations ease restrictions and holidaymakers prepare to drive long distances to hit the countryside and beaches.

But at the same time, the prospect of an increase in supply of Iranian heavy sour crude to the market, as well as rising stocks at Singapore and Fujairah, is pressuring fuel oil cracks.

Cracks for higher sulfur fuel oil were close to -$11/b amid reports that Singapore stocks were recently at four-year highs, while stocks in the Middle Eastern hub of Fujairah are 30% above the 2019 level.