Asian 180 CST HSFO supply to rise in 2024 on South Asia's alternative fuel push

Asia's supply of 180 CST high sulfur fuel oil is set to rise in 2024 amid structural changes in South Asian supply and demand as the region pushes for cheaper or cleaner alternative fuels in power generation, possibly setting the stage for a sustained narrowing in the viscosity spread.

The changes have been most apparent in Bangladesh, Pakistan, and Sri Lanka, where either fuel oil exports have been or are expected to rise, or imports plummet, as governments and power generating companies rely more on coal, nuclear, gas or LNG for electricity generation.

Altogether, the changes are expected to see an increase of at least 50,000 mt of 180 CST or otherwise low viscosity grade HSFO supply in the region from 2023 levels.

In Bangladesh, the country has seen a wave of new coal-fired thermal plants starting up in the last year, which, along with ongoing fiscal concerns, have led to a sharp drop in 180 CST HSFO imports into the country.

Market insiders estimate Bangladesh's 180 CST HSFO imports in 2024 to be around 3.5 million mt, down 9% from around 3.85 million mt in 2023. Bangladesh's 2023 import volumes are around 11.50% lower year on year.

"Bangladesh's fuel oil imports in 2024 are projected to be lower, as the country's power sector is shifting to alternate, cheaper sources of energy like coal and gas. The country is also adding new coal capacity for power generation in 2024 to further trim the consumption of fuel oil, along with plans to increase imports of LNG," said S&P Global's South Asia oil markets analyst Himi Srivastava.

In Pakistan, fuel oil exports have surged as the government encouraged domestic power generation companies to use cheaper fuel sources such as gas, LNG, coal and nuclear-based plants.

Pakistan's low viscosity HSFO exports over the January to November period stood at 520,759 mt, up more than five-fold from 103,599 mt over the same period last year, according to data from the Oil Companies Advisory Council, an independent authority that compiles data on import, export and sales of petroleum products.

For 2024, industry experts expect total HSFO exports to climb to as much as 750,000 mt, S&P Global reported earlier.

A Pakistan refinery analyst said there was hardly any local demand for HSFO currently, adding that 90% of the furnace oil produced in the southern refineries was being exported as a result.

"While [Pak Arab Refinery Ltd] is exporting 180 CST, Pakistan Refinery and Cynergico are exporting 280 CST. The local sales are 180 CST," he said.

Ali Nawaz, CEO of local brokerage Chase Securities, said the government's push for cheaper fuels had caused cash flow issues at oil refiners and the piling up of fuel oil stocks. This led to reduced throughput and prompted some to start exporting fuel oil to keep motor gasoline and diesel production intact, he added.

In Sri Lanka, Ceylon Petroleum Corporation -- the sole oil refiner in the country and typically a net fuel oil importer -- is also expected to start regular exports of low-viscosity fuel oil in 2024 as it transitions to cleaner energy sources, according to sources, although further details were unclear.

"South Asia fuel oil demand is seeing a downtrend and consumption reduced by 40,000-45,000 b/d year over year in 2023 and may further see a small decline in 2024. Since both Pakistan and Bangladesh are HSFO-consuming countries, we are estimating the decrease to be the same for 2024," said Srivastava.

Viscosity spread

The result of the additional 180 CST HSFO supply coming into the Asian market is likely to lead to a sustained narrowing in the viscosity spread, or the spread between benchmark FOB Singapore 180 CST HSFO and FOB Singapore 380 CST HSFO cargo.

Over 2023, the physical viscosity spread averaged $9.54/mt, down sharply from an average of $28.54/mt for 2022, but up from an average of $8.22/mt in 2021. The spread was most recently assessed at $5.29/mt Jan. 5.

In the near term, this could see increasing volumes of the grade diverted to the 380 CST HSFO bunker pool for use as cutter stock, while in the longer term, governments might be incentivized to invest in infrastructure to convert the product into more valuable low sulfur fuel oil or middle and light distillate products.

"If there's no demand [for 180 CST HSFO] from power generation, then there's no need to produce 180 CST HSFO. But if someone is trading Russian HSFO, one needs to blend those with 180 CST grades to cut the 700 CST grades down to 380 CST HSFO. So, that's the potential demand," a Singapore-based fuel oil trader said.

The Pakistan government in August 2023 introduced a policy that calls on local refineries to completely halt production of fuel oil and opt for Euro-V motor gasoline and diesel production, a process which would take approximately four to five years to complete.