Rising Chinese demand for energy that’s helped push shipping costs higher may lead to a fivefold increase in the premium of Asian December fuel oil over January.
The extra cost for next-month fuel-oil swaps traded in Singapore compared with January contracts may climb to $5 a metric ton during December from $1 a ton today, according to a survey of four traders by Bloomberg News. The last time the difference, or timespread, reached that level was October 2009.
Rising shipping charges are deterring traders from increasing imports into Singapore, Asia’s trading hub. Increased cargoes of below-standard fuel oil from other regions such as Latin America and the Caribbean have also boosted the premium, known by traders as backwardation.
“Imports remain scarce,” so the premium is unlikely to dissipate, said Yasuhito Imaizumi, a Singapore-based manager at Petro Summit Pte, a unit of Sumitomo Corp., Japan’s third-largest trading company.
The decline in cargo arrivals pushed December contracts above January’s on Nov. 11, the first time in three months there has been backwardation in the Asian market for fuel-oil swaps, which traders use to hedge against future swings in prices.
Singapore imports of fuel oil, a residue from crude refining used to power ships and generate electricity, may fall to 3.8 million tons in November and 3 million tons in December, the lowest since May, according to the survey. About 4 million tons may have arrived in October, the traders estimated.
Cargoes are sliding as the cost of hiring ships to carry the fuel increases. Rates for chartering vessels that can convey 80,000 tons to Singapore from the Mideast have climbed almost 23 percent in the past month, the most since May, according to data compiled by Bloomberg.
China is suffering a shortage of fuels such as diesel as farms increase consumption to drive machinery during the harvest season and factories seek alternative supplies to run generators as the nation limits energy use under a five-year government plan. Premier Wen Jiabao wants to reduce power consumption per unit of gross domestic product by 20 percent in the five years through 2010. A new five-year plan is due to start next year.
Lower-quality shipments into Asia from other regions is increasing amid the shortage. Cargoes from Mexico contained more than 2 percent water, while imports from Venezuela had about 0.8 percent of water, Imaizumi said. Water content should be no more than 0.5 percent, according to recommended levels set by the International Organization for Standardization.
“An increase in cargoes with high water content or high metal content was another trigger for the backwardation,” Imaizumi said. “These off-specification cargoes require blending with other fuel but blending material is also getting tighter now in Asia.”
Chinese state refiners are boosting imports of diesel to help meet increased use. PetroChina Co., the country’s biggest oil and gas producer, is planning additional cargoes after buying 200,000 tons from overseas, China National Petroleum Corp., its parent company, said Nov. 22. China Petroleum & Chemical Corp., the nation’s largest refiner, has halted diesel exports, parent China Petrochemical Corp. said Nov. 19.
The widening of the timespread may be limited as gains in the nearest December swaps may be capped by year-end selling, said two of the traders surveyed.
The price of 180-centistoke fuel oil rose 1 percent to $495 a ton this week, while the price of 380-centistoke grade, mainly used as marine fuel, increased 1.5 percent to $486 a ton.
Some European traders and refiners may sell cargoes to cut fuel oil inventories and reduce holdings before the year ends, said Akira Kamiyama, an energy derivatives trader with Mitsui & Co. in Tokyo.
“The tightness may also be reduced when shipping charges start coming down and Singapore imports increase in December and January,” Kamiyama said.