Singapore HSFO is already rising relative to Rotterdam. Image Credit: Ship & Bunker

The bunker market should prepare for a significant divergence of prices between Europe and Asia in the event of US strikes on Iran over the weekend, according to hedging firm GRM.

GRM held a webinar for its customers on Friday to discuss the market implications of growing military tensions around Iran. The US has significantly built up its military presence in the region this week, and there have been reports that strikes on Iran could happen as soon as this weekend.

War in Iran would be likely to drive up prices for all oil products, and Brent crude futures have already gained almost $3.50/bl this week as that prospect has become more likely. But one of the bigger impacts is likely to be seen in HSFO prices in Asia relative to Europe, Udayan Bhattacharya, chief energy and options trader at GRM, said in the webinar.

China is a significant buyer of Iranian crude, which comes with a high fuel oil yield when refined, and disruption to this supply would drive up Asian prices significantly.

"In the build-up to all of this, the front month of Asian high sulfur has gone up compared to European high sulfur a fair bit," Bhattacharya said.

"I would expect in the eventuality of some military action, we should expect the front-month to skyrocket, especially with all the Iranian heavy crude going into China.

"That's going to have a significant impact on Asian high-sulfur supplies.

"People who are worried about a sustained attack should look at the long end of the curve and buy that while it's still cheap."

HSFO delivered in Singapore currently comes at a $39.50/mt premium to Rotterdam, according to Ship & Bunker prices, up from a $6/mt discount at the start of the year.

The opposite effect may be seen in gasoil markets, with Europe more heavily affected than Asia, and VLSFO's reaction may be somewhere between that of HSFO and gasoil, according to GRM.

"If we do get military action in the Middle East, or eventually some sort of action in the Strait of Hormuz, I think European diesel supplies will be heavily impacted," Bhattacharya said.

"We could end up in a situation where the gasoil east-west spread actually goes negative, because European gasoil is going to be under much heavier pressure than Asian gasoil.

"VLSFO is somewhere in the middle; it's a bit hard to predict, it's a blended component, and a lot of the blending components come from the Middle East and India. 

"It's kind of in between gasoil and HSFO."