Time to start worrying a bit about 0.5 EW?

Very short mid-week note on low sulphur.

In the last few low sulphur updates I have argued the case for continuously leaning long 0.5 EW but I am seeing some signs today that are worth mentioning.

Balmo EW 0.5 is hovering around $170/mt while Oct is a tad above $130/mt. Meanwhile, Sing 0.5 Balmo/Oct and Oct/Nov are both just below $50/mt. On the other hand, lumpsum freight for the Rott-Sing route is around $15.5-16M at the moment for a Suezmax.

That puts us in a pretty interesting situation in the very prompt where EW is wide enough to cover a very good portion of freight & costs and also structure that European on-spec 0.5 arbs to Singapore via the Cape look just a couple points away from being open (and if you can get a ship through Red Sea it may already be slightly open).

I don’t think we have seen anything this close since early June so I would really watch out for potential downside on prompt 0.5 EW here. Having said that, even if these could move now they won’t hit Sing until end Oct or early Nov so account for the runway there.

(Rott-Sing 0.5 Arbitrage Margins)

This next bit is very experimental with many moving parts that I’m still heavily tuning so take it with a big pinch of salt. The entire oil system can be thought of as a system of options. Booking an arb, refining crude or making a blend can all be modelled as exercising an option.

Now that we have run the arbs long enough at Sparta to have a bit of historical data as a guide for volatility (and I will surely get reprimanded for doing that), we can model the Rott-Sing arb (and any others) out as a call with a strike price of 0 which comes with all the cool numbers.

The model currently gives 40% chance (basically the delta) of this arb being open. More on this approach in another piece.

On another note, these forward blend margins don’t look good for the independent low sulphur blenders in ARA – blend costs still seem pretty high now relative to what you can get selling on-spec VLSFO there.

(ARA VLSFO projected forward blend margins)

That’s not too surprising given that the blend pool has to compete with the feedstocks pool which is providing all the signals to pull resid into the conversion units.

(NWE RFCC + Coker margin proxy on Skikda LSSR)

Similar story in the East here with the propensity to convert resid still a lot stronger than producing components for blending.

We will need to see more signals on how much re-routing of Saudi crude export back to Ras Tanura will be done and where it heads to before we get a better idea on the forward primary resid supply picture in the East.

(Dar Blend margins into NEA medium complexity vs SEA topping units)

In conclusion, as long as we have a good portion of AG crude not making it through the SoH or alternative routes, we still have a (very) strong tailwind for the low sulphur complex in the East in the form of lower primary resid supplies. I don’t feel comfortable being bearish the complex with that tailwind still blowing but 0.5 EW is one to be careful about the downside here from arbs signals alone.

Two bonus charts for how the sulphur curve is evolving in Singapore and ARA. Hi5 paper is pretty much in line with the blending economics right now though 1% is still looking a bit under-valued relative to 0.5% in ARA.

(Sing sulphur curve – Oct’26)

(ARA sulphur curve – Oct’26)