Incremental Supplies, Sluggish Demand To Weigh on Asia LSFO Market

Credit: Erik Mclean/Unsplash
  • Sluggish container shipping market may impede bunker demand
  • China’s economic recovery may lend support to the market
  • Any significant upside may be capped by incremental supply

The Asian low sulfur fuel oil market is expected to face headwinds in 2023 on dull demand amid rising supply, reports SP Global.

China wildcard

Asia low sulfur market participants are cautiously optimistic while watching developments in China since it has lifted its most severe COVID-19 measures.

An uptick in demand would bolster trade, while firming middle and light distillate products’ margins would result in less low sulfur material finding its way into the marine fuel pool, traders said.

Meanwhile, an uncertain demand recovery prospect has led the market sentiment to be largely mixed, with some participants pinning hopes on a recovery in the container shipping segment to boost bunker demand, whileothers suspect demand-supply balances to be tilted toward a surplus.

On the supply side, arbitrage volume is expected to be steady to firm in 2023 on incremental supply from the Middle East coupled with elevated levels of Russian barrels likely finding their way East, traders said. Regional LSFO output is likely be relatively less, however, as refiners are expected to ramp up production of gasoil and gasoline in the near term.

“As long as it’s economically viable, Russian fuel oil is expected to continue finding its way into Singapore/Malaysia and Fujairah, bolstering inventory levels in these bunkering hubs, while India and some other key Asian buyers could show a healthy buying appetite for Russian SRFO and crude as refinery feedstock,” S&P Global Commodity Insights analyst Shu Zhang said.

Demand shift risk

One of the factors that is likely to pressure the Singapore LSFO market is the threat of competition in the downstream marine fuels market from some of the major North Asian bunkering hubs, especially Zhoushan in China, traders said.

“In 2022 some LSFO volumes have gone to China, and 2023 might not be any different,” a Singapore-based bunker trader said.

With China’s economy expected to bounce back in the ensuing months, freight activity is likely to see an uptick, thus lifting bunker demand at local ports, traders said.

At 5.45 million mt, Zhoushan’s January-November 2022 bunker sales have come within touching distance of its 2021 sales volume of 5.52 million mt, which was up 9.9% year on year, latest available data compiled by S&P Global Commodity Insights showed.

Meanwhile, the number of ships calling Singapore for bunker over January-November 2022 fell 5.4% year on year to 34,351, while for 2021 it was down 2.8% year on year at 39,447, latest available data from the Maritime and Ports Authority of Singapore showed.

Beijing has issued 8 million mt of export quota for fuel oil in its first batch for 2023, S&P Global reported Jan. 3 quoting several sources with knowledge of the matter.

The fuel oil export quota is up 23.1% from 6.5 million mt in the same batch for 2022. The first batch of allocation is also almost half of 16.75 million mt for the whole year of 2022, as Beijing continues its push to grow bunkering at Chinese ports.

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Source: SP Global