High-Sulphur Fuel Oil Market Strength and Hi-5 Spread Widening Expectations

Hi-5 fuel oil spread likely to widen

The high-sulphur fuel oil (HSFO) market has seen significant strength this year. In fact, the HSFO crack traded at an unusual premium in north-west Europe briefly over the summer. A key driver in the strength of the HSFO market has been the tightness in the medium sour crude market, which as mentioned has come about due to ongoing OPEC+ supply cuts. The tightness in the sour market is reflected in the unusual discount of the Brent/Dubai spread.

In addition, the European market would have been supported by reduced Russian flows since the EU ban was implemented earlier in the year.

Over the summer months we would have also seen the usual stronger demand in the Middle East for cooling purposes. This demand should ease in the months ahead, which should support the view of weaker HSFO cracks. Already, we have started to see these cracks weakening from their recent highs. However, this weakness is likely to be somewhat limited given the tightness in the medium-sour crude market.

As for very-low sulphur fuel oil (VLSFO), we expect this market to be relatively well supported given the strength that we are seeing in middle distillates and the expectation that the middle distillate market should hold up relatively well through the coming months.

Therefore, given expectations of some weakness in HSFO and support for VLSFO we believe the Hi-5 (VLSFO-HSFO) spread will widen from current levels. It is also worth pointing out that we are not far off from levels where this spread has historically found some good support.