Event News
Added Oct 12, 2020

Event Wrap: Low sulphur fuel oil market outlook, tracking the new normal

Share this article
Vortexa Newsletter Subscribe and get Vortexa news straight to your inbox
Our expert speakers Cosmo Kedros and Serena Huang discussed how low sulphur fuel oil (LSFO) markets have been dramatically reshaped in 2020 in our webinar hosted on 30 September. 

In the presentation, Cosmo and Serena discussed:

  • Top LSFO trends, with case studies on West Africa, Scandinavia and Algeria
  • A focus on Singapore including onshore and offshore inventory trends, heavy sweet crude blending, and export flows changes
  • Key HSFO dynamics, with case studies of Russian flows to US, and Saudi Arabia’s summer intake
  • A look at what’s next for LSFO & HSFO in coming months

We’ve summarised some of the main discussion points from the webinar in an edited Q&A below. Watch the on-demand webinar to watch the discussion in full. 


What were the expectations of the fuel oil market going into 2020, and how does this compare against the reality that we’re seeing today?

The biggest story in oil [going into 2020] was the imminent IMO 2020 transition of the global fleet; switching to cleaner bunkers with an emissions cap of 0.5% sulphur. On the face of it - a hugely inflationary global mandate that would push up all transportation costs and thus the cost of international trade. Expectations were that this would draw heavily on the distillate pool to displace cheaper and dirtier heavy fuel oils. 

However, the market underestimated how much compliant fuel would actually be available due to the availability of cheaper blended fuels and additional desulphurisation capacity coming online within the refining complex. Accordingly, refinery margins weakened dramatically coming into Q4 of 2019; we saw much weaker distillate cracks and weakness on gasoline, and indeed negative naphtha cracks as well. 

Additionally, the demand destruction of refined products brought on by the arrival of Covid-19 would double down on an already very bearish demand picture.


What are the key LSFO flows trends that emerged this year?

There were several major changes in LSFO flows across the world all the way from Brazil to Algeria and Scandinavia on the supply side to new destination markets in Asia. Some of the top trends we've seen are:

  • Brazil and Scandinavia doubling exports to Singapore
  • Algeria's low sulphur fuel and low sulphur straight run exports shifting from US refiners to major Asia bunker players
  • The UAE and Russia ramping up low sulphur fuel oil output with increased flows to Singapore, again for bunker blending and consumption

Let’s discuss more about Scandinavia’s VLSFO exports. How have refiners adapted themselves to produce more VLSFO?

Scandinavia’s VLSFO exports in the first three quarters of this year are up 75% compared to the same period last year, a function of refiners gearing up for IMO 2020. Notable examples are the Swedish port of Brofjorden, and Kalundborg in Denmark.

We see a major shift in the crude slate going to these ports, which has likely supported VLSFO fuel oil output - Brofjorden’s light sweet crude imports are more than 6 times higher so far this year vs full 2019 volumes, while Kalundborg has diversified its crude imports with more medium-heavy sweet grades arriving this year compared to previous years. 

Exports dipped in Q2 but have since recovered in Q3, no doubt linked to the wider impact of Covid 19.


Shifting our focus to Asia, what are the latest trends on Singapore’s fuel oil inventories and flows?

Singapore’s floating storage inventories drew to a low of 4.1mn mt in August, the lowest seen since February, while onshore inventories registered a 9-month low of 3.1mn mt in early September. 

Key drivers behind this inventory draw are, first, a steady recovery in Singapore’s fuel oil bunker sales since May, and second, a rise in Singapore’s fuel oil exports to a high of 2.7mn mt in August, with the highest flows headed to China, Saudi Arabia and South Korea. 

The rise in Chinese LSFO exported into the bonded bunker market, supported by the issuance of export quotas and tax rebates, has led to narrowing of bunker price spreads between Zhoushan and Singapore, but to a point that still supported a steady stream of exports from Singapore to China. 

Besides China, we also saw a rise in HSFO exports to Saudi Arabia on increased summer heating demand. It was a rare occurrence to see a reverse arb flow from Singapore to Saudi Arabia starting in July, and rising to a peak of 900,000 mt in August, before cooling to around 500,000 mt in September, supported by higher spot Middle East Gulf fuel oil premiums compared to Singapore. More fuel oil has also been exported from Singapore to South Korea as feedstock for residue upgrading into VLSFO and distillates.


While LSFO has taken centre stage this year, have you observed any interesting changes in HSFO trade flows?

Russia’s fuel oil exports to the US have cemented itself as a baseload flow, accounting for more than half of the US fuel oil imports this year. Lower availability of heavy crude from Venezuela and other OPEC+ countries, coupled with affordable dirty freight rates, has led US refiners to import fuel oil from Russia to supplement feedstock into their secondary upgrading units.

We have also seen a steady rise in Mexico fuel oil exports to the US since May. Despite the closer proximity, Mexico’s fuel oil is still typically more expensive than Russia’s on a delivered basis, and therefore less preferred by US refiners. We expect Russian fuel oil exports to remain robust as long as US crude intake is kept subdued, and dirty freight rates kept low. 

This Russia-US fuel oil trade is significant as it highlights that HSFO has found an important outlet in the form of refinery coker demand on the US Gulf coast. 


And finally, what are your thoughts on the LSFO price outlook?

The world’s refining system is currently dealing with an overhang of refined products in onshore and floating storage. Clearly there is a surplus of refining capacity and so a key question is how much impact run cuts and the autumn refinery turnaround season will have on global LSFO supply?

Meanwhile, on the demand side, if we continue to see cases of Covid-19 mount this will have a deep impact on freight/bunkers, and therefore bearish on LSFO prices.

Specifically for the Mediterranean market, one interesting factor is any potential ramp up in Libyan crude exports. Should this materialise, it would provide a boost to LSFO supply in the Mediterranean, especially Italy and Spain - historically the biggest buyers of Libyan.

There has been quite a bit of talk about jet fuel blending into the fuel oil pool in recent weeks. But it’s worth pointing out that this is really tricky given flash point considerations and the risk of producing off spec fuel oil. There’s certainly much more credence to jet fuel blending into the diesel pool. 


Watch the on-demand webinar here to get more details on other topics discussed, including: Where are the key West Africa and Algeria fuel oil streams headed to? Is heavy-sweet crude still in demand for VSLFO blending? What is the HSFO price outlook?

The latest news

Dec 15, 2021
Event News

In this special webinar, Vortexa’s Market Analysis team came together to analyse where the global markets stand in the road to recovery and what challenges, opportunities and risks are waiting around the corner in 2022.

Nov 20, 2021
Event News

As global market volatility continues to rock America and beyond, Vortexa’s Chief Economist David Wech and Senior Market Analyst Pamela Munger shared their expert insights on Crude and Clean Product supply and demand market dynamics and how to effectively manoeuvre operations to stride ahead of competitors.

Oct 21, 2021
Event News

Vortexa Chief Economist, David Wech, and Lead Analyst, Jay Maroo, discuss the latest market insights derived from oil & gas flows.


Get in touch today for a free trial