Egypt to procure Fuel Oil as gas, LNG prices remain uncompetitive: sources

Egypt has been procuring fuel oil to meet domestic demand requirements and optimize its volumes as global gas and LNG prices remained elevated compared to alternative fuels, sources said.

Platts, part of S&P Global Commodity Insights, assessed the DES Northwest European marker for January at $14.209/MMBtu on Dec. 6, this was down 0.43% on the week but nearly 13% higher since the start of the winter heating season on Oct. 1.

In dollars per metric ton -- oil equivalent -- the DES NWE LNG marker was around $549.08/mt.

At the same time, the January swap for 1% fuel oil FOB NWE cargo was assessed at $413.25/mt with prices for the 1% fuel oil January derivative falling nearly 5% on the week and 0.42% lower since the start of the heating season.

The $135.83/mt spread between fuel oil and LNG compared with the previous day's value of $130.41/mt.

The current LNG-FO spread is also comparable to the $46.69/mt premium seen this time last year.

Although Egypt tendered 20 cargoes for Q4 and was preliminarily expected to tender 15 to 20 cargoes for Q1-2025, according to S&P Global Commodities at Sea, around 11 cargoes have been delivered to the North African country so far.

In 2024, Egypt imported a total of 2.19 million mt of LNG in 32 cargoes, with 20 cargoes imported in Q3.

Egypt is expected to procure a spot cargo today, Dec. 6, followed by two more for December -- one on Dec. 14 and one on Dec. 22 -- according to Commodity Insights data. Traders added that there has been potential for cargoes to be canceled.

The data showed that all three cargoes were arriving from the US, with the total volumes amounting to 220,000 mt.

Traders attribute the delays or cancellations in cargoes to lower domestic demand in the North African country. Lower residential and commercial demand -- for cooling -- over winter coupled with lower demand from domestic industries such as fertilizer and petrochemical plants has led to Egypt not requiring as many cargoes of liquefied natural gas.

Additionally, with global geopolitical and supply-side risks keeping European natural gas and LNG prices elevated, traders have seen Egypt upping their procurement of fuel oil over LNG.

Mehrun Etebari, director at Commodity Insights, said gas demand was previously kept in check by increased gas-to-oil substitution for power generation in late 2021 and early 2023, when spot prices for LNG soared above fuel oil prices.

With weaker domestic gas production, Egypt increased the use of fuel oil in power generation to conserve gas for LNG exports, Etebari added. However, the evaporation of LNG spot price premiums over fuel oil in early 2023 led to a decline in this substitution.

"Higher gas availability has fed increasing gas-fired capacity, displaced fuel oil that had been substituted for gas, and combatted power shortages," Etebari said. "The power sector has historically been the largest consumer of gas in Egypt's economy, making up more than 60% of all consumption ... The end of a period in which spot LNG prices were significantly above fuel oil prices has disincentivized gas-to-oil switching, returning the market to gas demand growth since 2023."

Sources said Egypt has been rescheduling and canceling LNG cargoes for Q4-2024 amid lower domestic demand, waning gas production, and elevated LNG spot prices, which have seen an uptick in Fuel Oil imports into the country.

"Egypt is buying fuel oil rather than gas. Indeed there is lower demand, but also there is some optimizing as [fuel oil] is cheaper than gas and LNG," an LNG trading analyst said.

HSFO traders also noted a shift in demand dynamics, with rising gas and LNG prices creating new opportunities for HSFO usage, particularly in power generation. Speculation is emerging that Egypt may begin sourcing fuel oil for this purpose, further tightening the market.

Arrivals of 480,170 mt of HSFO are in transit and expected to land at Port Said in December, according to CAS data.

Traders noted elevated HSFO demand in Europe contrary to expectations of end-of-year weakness.

One trader source said they were surprised by the recent HSFO price strength in Europe, noting that bunkering demand for HSFO remains elevated within the ARA region. According to data from the Port of Rotterdam, sales of HSFO exceeded VLSFO in 2024 for the first time since IMO 2020 was introduced.

In the Mediterranean, the same source noted that he sees countries like "Egypt and others in the region" taking in more HSFO cargoes recently amid more expensive alternatives.

Recent price increases in HSFO and crack spreads within the paper market have been closely tied to a significant shortfall in cargoes aimed at the Amsterdam-Rotterdam-Antwerp (ARA) region.

This shortfall has been further intensified by several refinery outages, particularly in the Mediterranean, which have supported upward price momentum. The fire at Turkey's Tupras Izmir facility, along with additional disruptions at the MOH refinery, has led to an estimated loss of significant volumes from the Eastern Mediterranean market. Compounding these challenges is an outage at Saudi Arabia's Yasref refinery.

Despite a recent influx of approximately 600,000 mt of HSFO supply into Europe, concerns remain that incoming supplies may fall short of meeting demand, especially as demand for HSFO from the Middle East has surged, driven by high gas prices and geopolitical tensions related to the Russia-Ukraine conflict.

In the paper market, traders have described a recent surge in crack spreads as a "wild run-up," driven by worries surrounding supply adequacy amid refinery outages.

Additionally, ongoing discussions about potential OPEC production cuts are fostering expectations of tighter market conditions.

Prices have returned to more balanced levels, with the paper market mirroring these trends.