Damage from hurricanes in the Caribbean, which sends a substantial amount of fuel oil to the U.S. Gulf Coast, could lead to a glut of the fuel, S&P Platts reported, citing sources with knowledge of the situation.
Hurricanes Irma and Maria, which made landfall in the Caribbean over the last two weeks, damaged several fuel storage terminals in the region, which are used to store fuel oil coming from the U.S. Atlantic coast, Europe, and Latin America. The fuel is then sent on to the Gulf Coast, Panama, and Asia.
After the damage, however, a lot of the fuel oil originally sent to the Caribbean terminals will likely be rerouted to the Gulf Coast, where there is already more than enough fuel oil. S&P Platts spoke to traders and brokers who said that cargoes of fuel oil are already being diverted and that this will add to a swelling glut. The glut was partially caused by increased fuel oil production: last week, the fuel oil yield from Gulf Coast refineries hit 3.8%, the highest since the beginning of 2014.
The situation, unless it changes quickly, which is unlikely, could have a dramatic effect on fuel oil prices. According to S&P Platts’ trading sources, currently the market for benchmark High Sulfur Fuel Oil on the Gulf Coast is in normal backwardation, with the spot price as of last Thursday at a premium of $1.80 a barrel to the October HSFO swap.
The spike in prices came in the wake of Hurricane Harvey, when supply was limited and traders were eager to fulfill their orders. Naturally, this premium spurred greater interest in spot deals with the cargoes shipped to Houston. One such cargo, a bulky 500,000-barrel one, should arrive in Houston at the end of the month.
With supply swelling so fast, the backwardation could fast become contango, the sources warned, if a lot of fuel oil gets marketed in Houston instead of the Caribbean