Tightening Supply Drives Surge In Asia’s HSFO Cracks

Asia’s high sulfur fuel oil (HSFO) market has experienced a surge, with refining margins reaching a 17-month high. Tightened supply and rising bunker demand have played a key role in driving the market upwards, although challenges such as weaker Chinese feedstock demand and the impact of new sanctions remain in focus.

Key Highlights

1. Refining Margins Surge:
   • Asia’s HSFO refining margins have spiked due to limited availability and expectations of tighter supplies following US sanctions on Russia’s energy industry.
   • The Singapore 380 CST HSFO crack spread against Brent crude surged by 38% in January, peaking at minus $2.64/b on January 21, its strongest level since August 2023.
   • The market for Singapore 380 CST HSFO cargoes also saw a 35% increase in cash premiums during January.
2. Market Sentiment and Backwardation:
   • The M1-M2 spread for Singapore 380 CST HSFO saw its widest backwardation in nearly two months, rising to $8.75/mt during the week starting January 20.
   • This backwardation is attributed to rising premiums in the HSFO market, with traders seeing increased demand, particularly for Russian high sulfur content, despite ongoing sanctions.
3. Bunker Demand Supports Market:
   • The demand for bunker fuel in Asia is expected to remain strong, with the continued rise in scrubber-installed vessels and the decreasing installation costs compared to the initial phase following IMO 2020 regulations.
   • Singapore’s bunker sales reached a record high of 54.92 million mt in 2024, with HSFO accounting for 36.8% of the total sales, a year-on-year increase of 4.5 percentage points.
4. Challenges on the Horizon:
   • Despite the positive outlook, concerns linger regarding potential disruptions to supply chains due to the new sanctions, especially regarding Russian cargoes. However, traders report that there is no significant shortfall or delay in HSFO supplies yet.
   • China’s increased fuel oil import tariff and possible reduced demand for feedstocks could impact the near-term outlook for the HSFO market, particularly from February onward.
5. Outlook for 2025:
   • Positive sentiment is expected to continue into 2025, driven by steady term contract volumes and overall adequate stock levels. However, the ongoing geopolitical uncertainties, including the impact of sanctions and potential disruptions to arbitrage flows, could influence market dynamics as we move forward.

The Asian HSFO market has been buoyed by tightening supply and strong bunker demand, with margins reaching a 17-month high. However, challenges such as sanctions and potential shifts in Chinese demand could pose risks to this bullish trend. Traders will need to monitor these developments closely as the market progresses into 2025.