Since the previous weekend, when the Iranian response to the US peace proposal became known, the oil price has risen from USD 100 to USD 110. The market is fundamentally adjusting to the risk that the Strait of Hormuz closure could drag on, or that the war could break out again.
In our latest issue of the Weekly Market Report from 12 May, we described how several factors helped stabilise the oil market in April.
Fujairah
The weak demand in the Middle East market continues from recent weeks, with enquiry levels remaining very low. Product availability and terminal inventories are also at extremely low levels, with ex-wharf sellers encouraging suppliers to lift the remaining quantities available. At the same time, several suppliers have already loaded barges with product but are struggling to place volumes due to the lack of market demand. We expect these conditions to persist this week unless there is a positive local development regarding the SoH situation.
Demand in the Red Sea market also remains subdued, with enquiry levels continuing to be soft across the area. However, product availability remains stable, and operations are proceeding normally without any disruptions reported. Among the regional ports, Port Said continues to offer the most competitive pricing.
New York
Demand is steady with rising premiums on avails up and down the USEC. In particular, LSMGO avails are waning.
Panama
Crude moved up sharp and prices are still high.
Malta
Malta remains reasonably well supplied on MGO & VLSFO while ULSFO and HSFO are facing some loading delays, resulting in slightly longer lead times. Demand has softened marginally this week, which is also putting mild downward pressure on premiums heading into next week.
Port Louis
The PL market remains steady with regular callings and stable avails. Pricing levels are stabilising as replenishment of all grades becomes more available.
Durban
HSFO avails are tight with only one player with avails currently. VLSFO is OK and barges able to consider prompt. The gasoil market remains tight as clean product is in high demand with the majority focussed on the automobile sector.
Port Louis
Steady demand in Port Louis with more tanker volume coming in as vessels transit the CoGH from Asia. Avails remain OK.
Walvis Bay
Poor weather in the winter times has begun, with heavy winds and swells, meaning the majority of supplies now take place at anchorage which include a 15k STS cost and agency upon client. Demand is steady and avails are, for the moment, well supplied.
For port availability and demand, download the full report here.
But several of these stabilising factors are now at risk of being exhausted. That could send oil prices higher and increase the pressure in the physical market through higher Dated Brent and higher product cracks.
There is, however, no doubt that the White House wants to end the conflict. And with market rates and gasoline prices rising, and equity markets in the red both on Friday and Monday, the pressure to find a solution is mounting. Monday night, Trump announced that he had stopped an imminent military attack on Iran after a number of Middle Eastern states had asked for more time to find a negotiated solution
However, the direction for oil prices still points higher this week. If the pressure on both equity and bond markets continues, however, it could heighten concerns about growth and dampen oil prices.
At the end of the day, there is a tug-of-war between the US and Iran. Iran has lost its crude oil exports, and the White House faces high gasoline prices as the mid-term election approaches in the Autumn. Who will blink first?
Bunker prices (1M) are close to their April highs. Notably, VLSFO has started to become more expensive again relative to Brent, reflected in a higher crack. VLSFO is a blended product and is affected, among other things, by more expensive distillates such as gasoil.
The tendency towards a wider VLSFO crack is mainly seen in Singapore, and to a lesser degree in ARA and the US Gulf. The move in the Singapore crack may be the first warning sign from the paper market that the market is tightening further.
As discussed above, we see a risk that tightness will return to the physical market if the closure extends towards the end of June. For VLSFO, the impact will be felt through reduced availability of blending components. For HSFO, the lack of Persian Gulf products will add to the pressure.
The more expensive VLSFO has pushed the price spread between VLSFO and HSFO, the so-called HI5 or scrubber spread, further up in Singapore. We expect the tendency towards a higher HI5/scrubber spread to continue both in Asia and ARA. Note that the east-west spread is widening again for VLSFO. Asia is bidding up prices.
We have seen a significant drop in fuel oil inventories in ARA over the last month. It adds upside for ARA bunker prices. See also the specific port comments above.
