OREANDA-NEWS. December 23, 2016. Fuel oil prices are ending 2016 at 18-month highs, but may face downward pressure in the early part of 2017.

This year Gulf coast fuel oil prices rebounded nearly 200pc from mid-January lows, but the pace of this meteoric recovery may slow in the early part of 2017 as increasing stock levels and weaker demand weigh on prices. Stock levels notched four consecutive weeks of gains thru mid-December, according to US Energy Information Administration (EIA) data, driven by an imbalance between import and export cargoes.

Despite an open arbitrage to Singapore, that key export route has been blocked in recent weeks due to competition from cheaper European barrels.

New York Harbor 3pc sulphur residual fuel oil prices relative to the Gulf coast could strengthen in early 2017. New York fuel oil typically trades at a premium to the Gulf, but soft demand in the fourth quarter of 2016 has depressed prices there and narrowed the spread between the two coasts. To date in 4Q the spread has averaged around 85?/bl, compared to a year-to-date average around \\$1.42/bl, and in mid-December New York dropped to a discount to the Gulf, according to Argus data. The tight spread will preempt arbitrage movements to the Northeast, adding pressure to stock levels and portending potential price rises in 2017.

The value of fuel oil compared to Brent fell to a five-year low at below 60pc on a per barrel basis in January 2016. But crack spreads tightened as crude prices recovered throughout the year, and 3pc sulphur residual fuel oil prices as a percentage of Brent topped 89pc - their highest level since winter 2015 – in early November because of lower Russian residual fuel oil exports and stronger Singapore bunker demand. Given that there are no US refinery projects announced coming online in 2017 to curb domestic residual fuel oil production, fuel oil prices as a percent of Brent could be relatively stable in the mid-80s heading into 2017, provided bunker consumption is steady and Russian fuel oil output continues to decline.

Demand for lower-sulphur fuel oil in the Northeast may be tempered by above-average winter temperatures in early 2017. Electrical utilities store 0.3-1pc sulphur resid to use as backup fuel to meet peak demand during extended cold periods. But a warm season, or one where cold snaps are brief and infrequent, would leave these reserves idle.

The EIA forecasts 2016-2017 winter temperatures to be 17pc colder than last year, but the 2015-2016 season was well above average and overall the EIA expects the coming winter to be 3pc warmer on average than the past five years. Utilities are already entering the winter with ample supply left over from a mild 2015-2016 winter and, barring a significantly colder-than-forecast winter, tepid northeastern spot demand could weigh on the market in the coming months.