Q&A: Asia’s fuel oil market in Q4 2020

Q&A: Asia’s fuel oil market in Q4 2020

Q&A: Asia’s fuel oil market in Q4 2020

06 October, 2020
Vortexa Analysts
Vortexa Analysts

Asia’s fuel oil market has been volatile in recent weeks amid changing demand and supply dynamics. We go behind the scenes of these changes with a Q&A with Vortexa’s lead market analyst, Serena Huang.


  1. Photo_Landscape_Serena Huang


  1. 1. What is the current situation of Asia’s low sulphur fuel oil (LSFO) market and the outlook for Q4?

Asia’s LSFO market has tightened in recent weeks with the market structure flipping into backwardation – where prompt prices higher than future deliveries – since end September. Vortexa data show that arbitrage arrivals into Singapore recorded the second highest month year-to-date at 2.8mn tons in September, but this flow is expected to be slightly above half in October, with fewer loadings from key suppliers – Brazil, UAE and Russia. No LSFO cargoes are expected from Bahamas, which had previously supplied over 500,000 mt of LSFO each month between July and September.

Regional LSFO flows into Singapore in October are also expected to contract month-on-month, owing to reduced refinery runs and production issues. With the oversupplied distillates market dragging on refining margins, refiners are likely to operate at reduced rates in Q4 2020, exacerbating the LSFO tightness.

Meanwhile, Asia’s bunker demand has seen a steady recovery since May, especially in Singapore and China. Fuel oil bunker sales in Singapore reached a four-month high in September. But the sustainability of this momentum is questionable as a slowing global economy could weigh on bunker demand.

If Asia’s LSFO bunker demand remains robust, the market could see more tightness in Q4 2020. But heavy-sweet crude blending is a wild card that could alleviate this tightness and help rebalance the market. Around 60,000 – 80,000 b/d of heavy-sweet crude has been discharged into fuel oil floating storage offshore Singapore this year, and upside does exist if blending economics are favourable.


  1. 2. How will Singapore’s VLSFO vs HSFO spreads perform in Q4 2020?

While we expect to see a tighter LSFO market in Q4, conversely, we are likely to see a relief on the HSFO market tightness. The end of Saudi Arabia’s summer heating season has reduced the demand for fuel oil burn, releasing more HSFO supplies into the market. The HSFO reverse arb flow from Singapore to Saudi Arabia, which peaked at 800,000 tons in August, is expected to dry this month.

In terms of bunker demand, HSFO as a proportion of the total bunker fuel market has grown over the past months due to an increased number of vessels fitted with scrubbers. But we do not expect a big jump in Q4 2020 as scrubber uptake has slowed since the narrowing of fuel oil spreads in Q2. Perhaps the strength in Asia’s gasoline cracks could provide an upside for more refineries to purchase high sulphur straight run as feedstock into their catalytic crackers, but it is unlikely to absorb the incremental HSFO supplies in the market.

Overall, Singapore’s VLSFO vs HSFO spreads are likely to widen from current levels of $70/t, although the upside could be capped by lower refinery runs and increased feedstock uptake by refiners.


  1. 3. Is scrubber retrofitting still on shipowners’ minds?

Demand for scrubber retrofitting has evaporated with 0.5% LSFO vs 3.5% HSFO fuel oil spreads narrowing to $70/t (Singapore FOB basis) compared to $300/t at the start of the year. Shipowners that initially had plans to install scrubbers have delayed them. Scrubber retrofitting is a costly affair. Besides scrubber capital expenditure, there are also opportunity costs involved in taking the ship to the yard and keeping it offline for a month. That said, in the current weak freight environment, the cost of taking a tanker offline now is not as high as seen in previous quarters, where tanker bookings for floating storage sent freight rates sky-high.

Around 30% of VLCCs have installed scrubbers as of end September, according our data. The VLCC segment has the highest scrubber uptake among the tanker classes as it consumes more fuel per distance travelled than smaller tankers, yielding a shorter payback period.

Looking over a longer time horizon, the question is whether fuel oil spreads will remain narrow. It is difficult to see spreads returning to the highs of earlier this year, but a widening of fuel oil spreads as discussed above, could trigger shipowners to reconsider scrubber installations.


  1. 4. What are the next signposts fuel oil market participants should look out for?

Global refinery runs and OPEC+ production levels are the two key factors to watch for on the supply side. Higher refinery runs will yield higher fuel oil production, and if OPEC+ raises its production levels to support higher crude demand, the processing of more sour crude will lead to higher HSFO supplies in the market.

On the demand side, the global economic outlook will have the largest bearing on freight and in turn, fuel oil demand. Scrubber uptake will affect the proportion of LSFO vs HSFO bunker sales, and the outlook of transportation fuel demand (i.e. gasoline and diesel) will be a key driver for residue feedstock imports by refiners, particularly in the US and India.


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Vortexa Analysts
Vortexa Analysts