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USAC LSFO swaps in largest backwardation since October on cold weather: sources

https://www.chemnet.com   Jan 27,2015 Platts
The front- to second-month Atlantic Coast 1%S fuel oil swap spread is trading at its largest backwardation since October, mostly on cold temperatures and a tightening cash market, sources said.

The backwardation of the M1 and M2 swaps was heard trading at 55 cents/barrel. Platts last assessed the backwardation at or above that level on October 28, when the backwardation was assessed at 70 cents/b. The Atlantic Coast 1%S fuel oil swap curve has been in a contango from the beginning of November through January 21, mostly due to muted demand and a similar contango structure in the crude futures markets.

Backwardation between the front- and second-month 1%S fuel oil swaps in October averaged 65 cents/b, mostly due to suppliers stocking up on ultra-low sulfur fuel oil in anticipation of a colder-than-normal winter season.

Multiple sources said speculation about the upcoming winter storm in the US Northeast expected to bring as much as 2-3 feet of snow has been the driver of the increasing backwardation. Even with this storm, however, several US traders have said that ULSFO demand this winter has been significantly lower than it was last year.

Many US Northeast utility companies primarily use natural gas as their source of power, as it is usually less expensive than fuel oil. However, strong demand for natural gas can exceed supply by pipelines, which can lead to gas curtailments, spiking natural gas prices and making fuel oil a more viable option for power generation.

Fuel oil has become more competitive as prices have fallen alongside the recent global crude oil price collapse. For example, New York Harbor 0.3%S LP fuel oil prices are down about 54% from the same time one year ago, Platts data showed.

Oil-fired power generation has accounted for about 2% of total power generation in New England in 2015, but there exists the potential for a spike. In 2014, oil's share of the generation mix jumped to 25% at times.

One USAC trader said this storm could cause a huge spike in 0.3%S HP and LP fuel oil markets, which often price off differentials to USAC 1%S fuel oil.

The trader said it will ultimately depend on whether the storms cause power outages, effectively nullifying the cold weather.

"On paper, we should be able to make a dent in the inventories that have been sitting and waiting for this moment, but you have potential power outages that are a question," the trader said. "If the power goes out, the power plant won't run, and there is nowhere to send the power."
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