SINGAPORE: Major commodity houses are betting against each other on the direction of fuel oil in Singapore, the world’s largest market for shipping fuel, in a clash that has led to a record price swing and is set to smash monthly trading levels.
More than $750 million of physical cargoes have been traded in the first week of June during an end-of-day pricing window, accounting for about 60 percent of Singapore’s average monthly sales of the fuel and creating logistics challenges at the port.
Strong buying has been led by Swiss-based Glencore and Mercuria, China’s PetroChina, and oil major BP, daily trade data shows. Russian major Lukoil, Swiss-based traders Gunvor and Vitol, and French oil major Total are the main sellers.
“This time round it’s a serious play,” said a Singapore-based veteran oil trader with at least 10 years of experience in the industry.
Gunvor, Vitol, Mercuria, Lukoil and Glencore declined comment. The other companies did not immediately respond to Reuters queries.
The unprecedented trading volumes have been sparked by the Middle East summer, one of three seasonal events that can affect the demand-supply balance for fuel oil, along with Chinese New Year and the northern hemisphere winter.
A hot summer in the Middle East means more demand for fuel oil to run air conditioners, limiting exports to Asia and driving up prices, while a cool summer keeps Asian prices lower.
These seasonal events inject a level of unpredictability into the market and give traders an opportunity to take a position that can reap big profits through related derivatives trading.
Singapore’s half-hour Market on Close (MOC) pricing process determines the settlement price used for derivatives trading on both the U.S. Chicago Mercantile Exchange (CME) and the UK Intercontinental exchange (ICE).
With profit and loss stakes at more than tens of millions, market sources said emotions in the market are riding high.
A record 3.175 million tonnes of 380-centistoke (cst) fuel oil was traded in October 2013, which is likely to be surpassed this week if an average daily trade volume of 500,000 tonnes holds.
Yet traders caution that the recent surge of buying that has pushed up prices could face pressure from a potential release of stocks as individual companies face storage shortages.
Data from trade group IE Singapore showed onshore fuel oil stocks across 13 refinery and commercial terminals have swelled to their highest at 27.6 million barrels, or about 4.25 million tonnes, since at least 1999, when Reuters started tracking the data.
Managing large volumes within a short period of time can also be challenging logistically, and complaints against counterparties for non-performance are not uncommon.
“Jetties’ schedules in Singapore are already very tight, any incremental volumes will strain logistics very badly,” said a Singapore-based oil terminal representative.
Singapore’s oil terminals are concentrated around the western tip of Jurong, and the loading and discharging of fuel oil could overcrowd the limited space.
Energy and metals information group Platts, which operates the MOC pricing process, did not respond to a request for comment on how it would ensure that all the cargoes traded on screen will be carried out.
Last week’s high levels of activity were anticipated by a build-up in open interest in June-related fuel oil swaps, a measure of outstanding contracts that have yet to be squared off.Open interest for June 380-cst fuel oil derivatives reached almost 13 million tonnes by the end of May, according to ICE and CME data, more than double the typical monthly average. Traders said the level was higher than the last major showdown in October 2013.
