A steady stream of bitumen cargoes moving from the Mediterranean to northwest Europe could be under threat from a sharp jump in fuel oil values to which bitumen seaborne trade are closely tied. This has reanimated discussions in the market about the close relationship between the two.
Volatility in high-sulphur fuel oil (HSFO) means the arbitrage economics to move bitumen from the well-supplied Mediterranean to the tighter north now look far more challenging. Nearly 555,000t of bitumen has headed from the Mediterranean to northwest Europe this year — a figure essentially unchanged from the first six months of 2022.
Mediterranean HSFO cargoes have moved from a $38/t discount to prices in northwest Europe at the end of June to a $14/t premium from 7 July until 18 July. The unusual west Mediterranean HSFO cargo premium has many causes, including increased difficulty procuring sour crude grades, strong seasonal demand from east of Suez, and poor economics for moving product from the US Gulf coast to northern Europe.
This has an effect on bitumen cargo prices, most if not all of which are linked to HSFO prices.
On 30 June, the Argus Mediterranean bitumen index was assessed around $100/t cheaper than from Rotterdam, but by 14 July the latter's premium was just $55/t. Fob Rotterdam bitumen cargoes were last assessed at a $70-75/t premium to fob Rotterdam HSFO barges, and fob Mediterranean bitumen cargoes at premiums of between $5-30/t from different Mediterranean bitumen outlets. Suppliers in the eastern Mediterranean are usually at the lower level of this range.
Given the reversal in fuel oil values between the two regions, the Mediterranean to northwest Europe bitumen arbitrage is now difficult to work and some traders expect differentials to fuel oil to weaken in the south and stay firm in the north. This is compounded by limited bitumen tanker availability, high charter costs and expensive freight rates, which have increased in recent weeks thanks to stronger fuel oil values.
Some traders have said bitumen production has been prioritised over HSFO. Bitumen exports from Turkey, Greece, Italy and Spain have been much higher this month, according to data from Vortexa (see graphs), supporting this theory. Between 1-19 July, 353,400t of bitumen has been exported from the four countries compared with 388,700t in all of July 2022. Exports from Turkey and Greece have been particularly strong so far this month.
Bitumen cargo differentials to fob Mediterranean HSFO cargoes have come under pressure already this month, according to Argus assessments, as market participants adapt to the rapid HSFO price change. In the past two weeks, Spanish cargo differentials have dropped by $7-8/t, and differentials in Turkey and Greece by $2-3/t. With other bitumen export opportunities looking challenging, including to the Americas and Nigeria, support for these could erode further.
Buyers in markets including the UK have complained of the close relationship traditionally made between bitumen and fuel oil, with buyers using HSFO-linked indexes seeing sharp rises that they say are unrelated to the fundamentals of the bitumen market. Bitumen demand has been slow in many European countries this year, with French demand around 12pc down against last year and in the UK around 30pc down.
