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BNP Recommends Buying First-Quarter 2013 Asia Fuel Oil Spread

13 Dec 2012

The discount of fuel oil sold inAsia to Dubai crude will narrow as bunker fuel demand in the region increases as China’s economic growth recovers and a supply surplus will abate, BNP Paribas SA (BNP) said.

The bank recommends buying the discount, or crack spread, for the first quarter of 2013 to benefit from a seasonal increase in fuel oil demand along with the gains from better fundamentals, Harry Tchilinguirian, a London-based analyst at BNP, said in report dated Dec. 12. The price difference will also be supported by refiners using more residue supplies as a feedstock to produce gasoline and diesel, he said.

“The latest data from China augurs a potential firming of bunker demand,” Tchilinguirian said in the report. “With the return of regional refineries from maintenance and expected higher crude prices ahead, the appeal of fuel oil as a feedstock rises.”

The fuel oil crack widened to the most in four years on Nov. 29 as bunker demand slumped on concerns shipping needs would decline amid an economic slowdown. The price difference has since narrowed 38 percent. China’s economy, the world’s second largest, may grow 7.7 percent this quarter from a year earlier, snapping a seven-quarter slowdown, according to the median estimate in a Bloomberg survey of 30 economists conducted Nov. 20 to Nov. 23.

The Singapore fuel oil swap for January today traded at a $2.75 a metric ton discount to the February contract. The price difference, or timespread, has swung into a contango market since Oct. 30, when prompt deliveries are less than later supplies, highlight falling demand.

Given the contango, some traders may be tempted to store supply to profit from the price difference using floating storage, effectively keeping fuel oil off the market, according to the report.