Commodities 2024: Asian LSFO market to be dampened by adequate supply, weak downstream demand

The Asian low sulfur fuel oil market is likely to remain lackluster in 2024 amid a potential build in regional stock levels, while downstream bunker demand is expected to grow at a slower pace on the back of global macroeconomic concerns and as new scrubber-fitted vessels drive consumption growth for the cheaper high sulfur grades.

Although Kuwait's Al-Zour mega-refinery may prove to be less of a major indicator for the Asian LSFO market going forward, new capacity additions elsewhere such as Nigeria's upcoming Dangote refinery, especially during its startup phase, may lead to surplus availability of fuel oil, industry analysts and trade sources said.

"There's going to be a slight build throughout 2024, so it shouldn't be a fantastic year [for LSFO]," a Singapore-based trader said. "The recessionary factors of petroleum consumption are not as big in Asia as they are in the West, as it doesn't really make a big difference to Chinese consumption and exports for example. But globally, it would affect bunker demand to some extent," the trader added.

Sales of the International Maritime Organization-compliant grade at the world's largest bunker hub of Singapore, inclusive of the bio-blended product, rose 3.6% on the year to 31.219 million mt across 2023, while the share of overall bunker sales shrank to 60.2% from 62.9% in 2022, according to latest data from the Maritime and Port Authority of Singapore.

Singapore's traders foresee continued pressure on downstream margins as buoyed LSFO stocks spur intense competition across extended periods in 2024, while suppliers in ownership of integrated supply chains are seen to be in good stead to edge out other independent suppliers.

The LSFO cash differential for physical cargoes against the Mean of Platts Singapore strip has averaged $3.22/mt so far in 2024 through Jan. 17, compared with $10.37/mt across 2023 and $26.08/mt in 2022, according to S&P Global Commodity Insights data.

Al-Zour still a swing factor

Incremental supplies from Kuwait's Al-Zour refinery partly dampened the Asian LSFO fundamentals during the first three quarters of 2023, after which exports have predominantly stayed dry as the country switched to LSFO usage for domestic power generation and water distillation.

In a first export tender in four months, Kuwait Petroleum Corp sold a 130,000 mt-cargo from its Al-Zour refinery to PetroChina at around MOPS minus $7-$8/mt, trade sources said. But the cargo was headed to Fujairah and will not be coming into the Singapore Straits, they added.

"Concerns surrounding exports from Al-Zour in 2024 remain, though the refinery is said to be running at full capacity... exports from Al Zour will be the major swing factor for the LSFO market in H1 2024, but surplus barrels available for exports will again reduce towards end of Q2 when Kuwait's power stations might consume more LSFO instead of HSFO for power generation," said Himi Srivastava, oil market analyst at S&P Global.

LSFO outflows from the Kuwaiti mega-refinery, which was earlier expected to fundamentally alter global trade flows and make European arbitrage to Asia unviable, are currently expected to be relatively unchanged to slightly lower on the year, several traders said.

"I think for 2024, the expectation is that Al-Zour will hopefully reach steady state [in production]... and 2023 showed us how much they can consume domestically. And then Fujairah is also there to pull some cargoes," a second Singapore-based trader said.

"So, even if Al-Zour achieves steady production, the Asian market won't be swimming in oil... Meanwhile, it's uncertain when Dangote refinery will start exporting [LSFO.] From an economics perspective, I don't think Dangote will become an LSFO export machine."

Nigeria's new 650,000 b/d Dangote refinery has received the sixth and final crude cargo under an initial supply deal ahead of test runs and initial production, the refinery said Jan. 9. A 1 million-barrel cargo of Nigeria's Agbami crude has been delivered to the plant, the last of a 6 million barrel supply deal with state-run Nigerian National Petroleum Corporation, Dangote said. NNPC is a 20% equity holder in the project.

"There's a chance the [Asian] LSFO market would get super tight in summer if gasoline and gasoil is strong, and feedstock demand is good, while KPC doesn't export," said a third Singapore-based trader.

In the absence of LSFO barrels from Al-Zour refinery in Q4 2023 through so far in January, tighter supplies around the UAE's bunker hub of Fujairah improved outlook for the downstream market, resulting in stronger bunker premiums, traders said.

Competition from HSFO

"HSFO as a market is supposed to grow in terms of bunkers. It's because more and more new ships are having scrubbers... More demand is coming to the HSFO pool than LSFO," said another trader based in Singapore.

"It doesn't mean LSFO bunker demand is very weak, it's just that LSFO bunker demand will also grow, but not as much as HSFO," the trader added.

Singapore's HSFO sales rose 19.5% to 16.717 million mt in 2023, the highest since IMO's low sulfur mandate started in 2020, raising its share of overall sales to 32.3%, up 3.1 percentage points on the year, latest MPA data showed.

Better economics were bolstering investments in scrubbers on the back of lower costs of installations compared to pre-IMO 2020 days, coupled with reportedly shorter downtime at Chinese shipyards too, eventually shortening the overall payout period for shipowners to breakeven, according to market sources. This rings especially true for retrofits enabling consumption of the cheaper 500 CST and 700 CST grades, they added.

The spread between Singapore 0.5% sulfur marine fuel oil and the benchmark HSFO cargo prices -- known as the Hi-5 spread -- was assessed at $141.86/mt Jan. 17. The spread averaged $147.48/mt in 2023, down substantially from an average of $261.09/mt in 2022, S&P Global data showed.