Asia HSFO market likely to garner strength as traders shun sanctioned Russian oil

The Asian high sulfur fuel oil market is likely to strengthen, and quite significantly so, from prevailing levels as oil majors and trading giants begin to increasingly eschew Russian-origin oil, traders said.

Several market participants including oil majors, leading traders and shipowners had already voluntarily distanced themselves from trading Russian-origin oil since its invasion of Ukraine a year ago.

The G7-led coalition's decision to impose from Feb. 5 price caps on seaborne Russian petroleum products has however upped the ante in terms of constraints to finance, ship and insure Russian oil-related trades.

As such, the volume of Russian oil product flows, including vast amounts of fuel oil, into major trading hubs in Asia, which has hitherto been a destination of choice for these barrels, is likely to decline, traders said.

"You can probably see that [Russian oil eschewal] starting to take effect in the forward structure and the print values for the window," a Singapore-based fuel oil trader said in reference to the recent uptick in valuations of the Singapore HSFO market.

The spread between front-month FOB Singapore 380 CST HSFO swap and front-month 380 CST Rotterdam barge, also known as the East-West swap spread, which measures the viability to ship oil East, was assessed at $19.5/mt on Feb. 22. The spread, which was assessed at $1/mt on Feb. 10, has surged almost twentyfold in a matter of eight trading days, S&P Global Commodity Insights data showed.

"Think the ARA [Amsterdam-Rotterdam-Antwerp] region is weakening, and Singapore seems to be pulling product," another Singapore-based fuel oil trader said.

A strengthening of the Asian 380 CST HSFO market was also reflected in the uptick seen in refining margins for the product.

The front-month FOB Singapore 380 CST HSFO swap spread against front-month Brent swap rose to minus $17.58/b at the Feb. 22 Asian market close, a near nine-month high. The front-month 380 CST HSFO crack has strengthened by over $5/b from two weeks ago, when it was assessed at minus $22.88/b on Feb. 10.

An optimistic market sentiment is also reflected in the consolidation of the market structure at the front of the Singapore 380 CST HSFO swaps curve, which has strengthened from minus $2.5/mt on Jan. 12 to $3.3/mt on Feb. 15, before inching lower to $2.75/mt on Feb. 22, S&P Global data showed.

"There's a little bit of strengthening going on down the 380 curve. Europe has been softer and the East-West has really taken a big move up," a trader said.