Oil and Gas
Added Apr 21, 2022

Fuel oil markets brace for further tightness as utility demand gathers pace

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Global fuel oil prices are set to strengthen over the coming months being faced with a double whammy of rising demand and tight supplies. A crucial wildcard here is how much Russian fuel oil will find a home which could help alleviate the global supply shortage.

Middle East and South Asian fuel oil demand set to rise in summer

With the northern hemisphere moving towards the summer season, fuel oil demand from utilities, particularly in the Middle East and Asia, is on the rise as soaring natural gas prices make fuel oil burn for power generation a more economical option than natural gas during times of rampant inflation and stretched national budgets.

Fuel oil exports to Bangladesh and Pakistan ramped up to five-month highs totaling 80kbd in March. Early indications for April suggest that trend will continue with 105kbd exported to both countries combined in the first 20 days of the month.

The Middle East is also ramping up domestic consumption of fuel oil for utilities which is expected to limit the loadings from the region in the coming months. In fact, fuel oil exports from Iraq are at a seven-month low in April, which could see further downsides in the months ahead.

Fuel oil exports to Pakistan and Bangladesh-1

Fuel oil exports to Bangladesh and Pakistan (kbd)

Lower Russian supplies, contamination issues in Singapore whip up a perfect storm for higher prices

Fuel oil exports from Russia, the world’s top fuel oil exporter, have already shown clear signs of declines since the invasion of Ukraine which was quickly reflected in the markets as prices soared. Although fuel oil loadings in the first three weeks of April have rebounded m-o-m, they are still down by 20% y-o-y. This is happening at a time when the global markets were already grappling with limited fuel oil stocks as refiners around the world maximized gasoil oil output at the expense of blendstock residues used in the production of fuel oil.

Fuel oil loadings from Russia by destination country

Fuel oil loadings from Russia by destination region (kbd)

Furthermore, the emergence of contaminated HSFO bunkers in Singapore have also added to the supply uncertainty as ships divert to seek alternative bunkers and as additional barrels are sourced to dilute the contaminated batches.

With traders scrambling to source replacements to Russia’s vast fuel oil exports, the increased utility demand, and lower exports from key regions like the Middle East, is putting a further strain on supplies. This perfect storm has pushed fuel oil prices to multi-month highs recently, with markets poised for further spikes despite a recent retreat in prices.   

Elevated LNG prices to strengthen fuel oil demand in Q2/Q3

As LNG importers, particularly in Europe, race to fill storage capacities ahead of the next winter season, LNG prices are expected to remain firmly above those for fuel oil on a $/mmBtu basis, encouraging utilities to ramp up fuel oil demand throughout the second and third quarter of the year, potentially pushing fuel oil prices above their recent highs. 

However, one caveat limiting the global supply shortage would be the extent to which Russia can resume its exports as traders establish new procedures to ship the fuel to various destinations. This is illustrated by the spike in residual fuel oil loadings from the Amsterdam-Rotterdam-Antwerp (ARA) region which is by far the top destination for Russian fuel oil exports. 

ARA fuel oil loadings

Fuel oil loadings from ARA region (kbd)

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