FUEL oil inventories in Singapore, at the lowest in six months, will likely start building from October as Asian buyers scramble for limited Western cargoes to cover requirements, traders said on Thursday.

Falling freight rates and delays in maintenance by some European refiners, should they decide to hold back on turnarounds to capture improving margins, would also encourage arbitrage.

But shipments from the West would still be curbed by robust demand in the Middle East, which will absorb some of the European volumes, others said.

Onshore fuel oil inventories in Singapore fell for the third week last week, official data showed, as Western supply fell below average levels and major exporters Saudi Arabia and Iran diverted some export-bound cargoes back into domestic markets.

This brings spare capacity held by the city state's 12 major oil and oil storage firms to an all-time high of around 57 per cent, trade estimates showed.

Traders said the supply squeeze, which brought fuel oil cracks to a 4-year peak of minus US$3.29 (S$4.73) a tonne last week, has left the West-East arbitrage window wide open and desperate buyers would eventually pay the premiums for the coveted European cargoes.

'I think the market has reached a breaking point. If they have to buy, they have to buy,' said a trader, who forecast that October shipments into Asia from the West might go up to 2.8-2.9 million tonnes.

Western inflows to Asia shrank to just 2 million tonnes in August, a quarter lower than the year-to-date monthly average of 2.7 million tonnes.

Traders expect September shipments to match August levels, even as freight rates head south and has improved arbitrage economics.

Freight rates for the Singapore-Rotterdam route are at U$5.5 million for the Very Large Crude Carrier (VLCC), while it cost around US$6.8 million for a similar charter last month, a shipbroker said.

But any reprieve that Asian buyers can get in coming months will hinge heavily on the excess fuel oil that Europe can churn out, but forward paper values so far show the region will face tight supply next month due to some refinery maintenance, traders said.

The October/November intermonth spread for European fuel oil is at a firm US$4 a tonne in backwardation, similar levels as Asian swap numbers, reflecting market expectations that supply will be equally tight in the two regions, a trader said.

'The main factor is what volume of surplus fuel oil the West has got for export,' said the Singapore-based trader -- AP