Asia's fuel oil market is set to see a record volume of physical trades in June based on open interest in derivatives for the oil product, with backers of opposing bets expected to drive up activity in what is usually a high-demand period.

Fuel oil trades of the 380-cst grade for June could easily top 3 million tonnes for deals done on the price assessment process run by pricing agency Platts, traders said.

The volumes could nearly double the 1.75 million tonnes of 380-cst traded on the Platts Market-On-Close (MOC) process for May, they said, which were already more than five times the average monthly trade volumes over January to April.

Expectations for a record month of cargo trades were sparked as open interest for June 380-centistoke fuel oil derivatives reached a combined 12.8 million tonnes on May 27, according to Intercontinental Exchange and Chicago Mercantile Exchange data, a level traders said was far higher than the norm.

That's well above the 9 million tonnes of open interest on 380-cst in October 2013 when physical trades of the grade hit a record 3.2 million tonnes in the MOC process.

"Three to four million tonnes should be the number we are looking at (for physical 380-cst trades)," said a Singapore-based fuel oil trader.

PAPER TO PHYSICAL

A 380-cst derivatives contract is settled based on the average price for cargoes traded free-on-board Singapore over the contract month, as published by Platts.

This makes it advantageous for companies holding a large paper position to back it up with MOC trades.

How the large volumes of trades expected in June will impact prices is unclear, since it will depend on the market's ability to absorb available supply.

Supportive factors include rising marine fuel demand to power ships and increased summer demand for power generation in Saudi Arabia - which could limit the kingdom's fuel oil exports.

On the other hand, Singapore fuel oil stocks have surged to a more than five-year high and could pressure prices.

Fuel oil flows from the West could also be a key factor since cargoes from Europe and the United States typically meet at least half the region's demand. [O/FUELARB]

The 380-cst differential flipped to a premium this week, widening to a more than three-month high on Friday as it rebounded from a 6-1/2-year low hit on May 21. [FUEL/A]

Most derivative trades are concluded over-the-counter and counterparties are not revealed.

Over the past month, the biggest buyers on Platts' MOC process have been Glencore and BP and the biggest sellers Lukoil and Gunvor.

BP and Glencore declined to comment on it trading positions, while Lukoil and Gunvor officials could not be reached.

Platts is a unit of McGraw Hill Financial Inc.

Source: www.reuters.com

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