COMMODITIES 2025: Ample supply to pressure Asian LSFO market as bunker demand weakens

This is part of the COMMODITIES 2025 series where our reporters bring to you key themes that will drive commodities markets in 2025.

The Asian low sulfur fuel oil market is likely to be weighed down by more-than-sufficient supplies in 2025, while a persistent rise in the proportion of scrubber-fitted ships poses challenges to the downstream bunker market for the IMO 2020-compliant cleaner marine fuel grade.

Alongside regional supplies and arbitrage arrivals from Europe, steady inflows of finished grades, low sulfur straight run (LSSR) fuel oil and crude blend stocks from the Middle East and West Africa are expected to boost Asia's LSFO inventories, traders and industry analysts told S&P Global Commodity Insights.

"We do see a moderate build through the year in 2025. We don't see a supply deficit issue situation at all. So, it should be lower LSFO refining margins and weaker market structure ... We see no way for the LSFO stockpiles not to build," a Singapore-based trader said.

After exports from Kuwait's Al-Zour mega refinery flooded the Asian LSFO market, disrupting some traditional flows from European markets, Singapore -- the world's largest bunkering hub -- has seen incremental LSSR supplies from Nigeria's new Dangote refinery. More recently, shipments of Meleck crude from Niger have arrived, but sources said the West African heavy sweet crude is unlikely to be a significant dampener for the market going forward.

"We are expecting higher supplies to weigh on the LSFO market amid lackluster demand growth ... With the threat of tariffs, status quo of the Red Sea disruption, adoption of scrubbers and use of alternative fuels, LSFO demand growth will be pressured," Kendrick Wee, research and analysis director at Commodity Insights, said.

"More supplies are likely coming out of Kuwait into the market, although most of the increases would have already been seen in 2024. These may not directly come to Asia, but they will still indirectly help ease the LSFO balance. Additionally, we are expecting the resumption of heavy sweet crude exports from South Sudan to add more supplies," Wee added.

The LSFO cash differential for physical cargoes against the Mean of Platts Singapore strip has averaged $5.96/mt so far in 2024 through Dec. 20, compared with $10.37/mt in 2023 and $26.08/mt in 2022, Commodity Insights data showed.

In the Singapore downstream market, traders also anticipate that ongoing price competition from alternative bunker supply locations, such as Malaysia and China's Zhoushan hub, could create additional headwinds for the demand outlook in 2025.

Cheaper HSFO vies for bunker demand

The proportion of high sulfur fuel oil bunker sales has been consistently increasing in 2024, while low sulfur marine fuel sales dwindled, as newer scrubber-fitted ships coming out of shipyards joined the global commercial fleet and drove consumption of the dirtier fuel grade.

"I think that story will continue. I think we will still have a slightly marginal increase of HSFO bunker sales ... Overall, we think high sulfur will continue to nibble away at the low sulfur percentage of usage," a trader said.

"There are still some ships coming out in 2025 that will allow a little bit of growth on the high sulfur side relative to low sulfur. But we don't think it is an economic proposition at this point to put on new scrubbers," the trader added.

Although the percentage of HSFO bunker sales continues to increase relative to LSFO, several market sources said this trend is starting to stagnate.

Over January-November, HSFO accounted for an average of 36.6% of monthly bunker sales, up from the 32.2% average in 2023, according to the latest data from the Maritime and Port Authority of Singapore. Meanwhile, the proportion of LSFO in total sales fell to an average of 55.5% from 60.3% over the same period.

"It is plateauing ... Sure, more scrubber-fitted ships will join the fleet in 2025, but the acceleration in uptake is slowing ... In 2025, some 200-300 scrubber ships will join the global fleet, which is about half the number in 2024," Roslan Khasawneh, senior oil analyst at Kpler, said.

"IMO 2020 obviously prompted demand for scrubbers, but at the same time, the world was in lockdown at the start of the decade, forcing many shipyards to delay installations into the past couple of years."

"On top of that, the focus is now on decarbonization, and demand for 'cleaner' alternative fuels is on the rise, chipping away at the demand growth potential of conventional fuels," Khasawneh added.

The Platts-assessed spread between Singapore 0.5%S marine fuel oil and the benchmark HSFO cargo prices -- known as the Hi-5 spread -- was at $87.99/mt on Dec. 20, Commodity Insights data showed. The spread has averaged $126.78/mt so far in 2024, compared with an average of $147.48/mt in 2023, the data showed.