Asian LSFO market rebounds on firmer demand outlook as China cuts export quota

The Asian low sulfur fuel oil market structure and refining margins rebounded amid expectations for firmer demand after China released its third batch of export quotas for the year, which market sources believe may fall short of meeting the requirements of Chinese bunker suppliers, resulting in a further ramp-up of imports from Singapore.

Although increasing Western arbitrage inflows into the world's largest bunkering hub of Singapore are expected to boost regional stockpiles, trade sources said firmer Chinese demand would support Asian LSFO fundamentals in the near term.

Platts assessed the Singapore marine fuel 0.5%S October-November swaps time-spread widened its backwardation by about 61.4% on the day to $15.25/t at the Asian close Sept. 20, from $9.45/t in the preceding session, S&P Global Commodity Insights data showed.

The M1-M2 intermonth spread for FOB Singapore 0.5%S marine fuel swaps was pegged even firmer at $16.55/t in midmorning Sept. 23, after averaging $10.81/t in the last two weeks.

The Singapore front-month crack spread for the 0.5% sulfur marine fuel grade against ICE Brent crude futures jumped $2.57/b, or nearly 23%, on the day to $13.83/b on Sept. 20, its highest level in two weeks, Commodity Insights data showed. The front-month refining margin for October was pegged higher at $14.85/b in midafternoon Asian trading Sept. 23.

China's third batch of export quotas includes 1 million metric tons for LSFO, with the quota volumes for 2024 currently standing at 13 MMt, down from 14 MMt initially issued for 2023, with export allowances for LSFO at 470,000 metric tons for Sinopec, 440,000 metric tons for PetroChina and 90,000 metric tons for CNOOC, Commodity Insights reported earlier.

China's smaller LSFO export quota means "extremely bullish" market fundamentals in Asia, said one Singapore-based trader, adding that this would lead to a "potential 400,000-500,000 metric tons of potential pull per month from Singapore to China".

Another trader said the Chinese export quota is much smaller than expected, which will continue to support the LSFO market in the near term.

China's largest oil and gas company PetroChina has been actively bidding in the physical trade window in recent weeks, purchasing 420,000 metric tons of 0.5%S marine fuel during the Platts Market on Close assessment process so far in September, representing 75% of the 560,000 metric tons traded in the month, Commodity Insights data showed.

Another factor supporting the Asian LSFO market in September has been a recent drop in low sulfur straight run fuel oil supplies from Nigeria's Dangote refinery, following substantial inflows in August, according to trade sources.

A trader anticipates the LSFO market in Asia to be pretty well-supplied from mid-October onward, on the back of higher Western arbitrage arrivals, which contributed to some downward pressure earlier last week.

"But the general consensus flipped after the news on China's low export quotas came out. October still should see higher volumes from the West compared with September... which could cap any major upsides going forward," the trader added.

Meanwhile, the Asian LSFO market is also expected to see higher supplies from Kuwait's Al Zour refinery in coming weeks, trade sources said. Although planned turnarounds scheduled at the refinery during the fourth quarter would put a lid on its output, outflows should see an uptick as summer power generation demand in the Middle East wanes, several sources said.

Platts assessed the Singapore marine fuel 0.5%S cargo's cash differential over Mean of Platts Singapore marine fuel 0.5%S assessment higher on the day at a premium of $17.45/t Sept. 20, from $15.55/t in the preceding session. The cash premium, however, posted a weekly drop of 9.4% in the week to Sept. 20, marking its second consecutive weekly decline, Commodity Insights data showed.

Singapore's commercial stockpiles of heavy distillates rose 10% on the week to a two-week high of 18.5 million barrels in the week ended Sept. 18, Enterprise Singapore data released late Sept. 19 showed.

The country's fuel oil imports increased 3% on the week to 778,789 metric tons, with inflows from the Middle East more than doubling on the week to 232,435 metric tons, out of which 180,890 metric tons came from the UAE and the remainder from Iraq, the data showed.

Meanwhile, fuel oil exports to China surged to 146,122 metric tons in the week to Sept. 18, from just 53 metric tons the previous week, the data showed.