Ample supply, declining utility demand expected to weigh on Asian HSFO market in 2024

The Asian high sulfur fuel oil market could be sluggish in 2024 as more-than-adequate supplies and a steady decline in utility demand are expected to offset incremental consumption by new scrubber-installed ships coming out of yards, trade sources said.

Asia's supply of 180 CST HSFO is set to rise in 2024, as South Asia pushes for cheaper or cleaner alternative fuels for power generation. Meanwhile, Russian-origin barrels continue to find their way east following a ban on the country's oil product exports in 2023, while steady Middle Eastern supplies were also heading for the world's biggest bunkering hub in Singapore.

"HSFO as a market is supposed to grow in terms of bunkers because more and more new ships are having scrubbers ... In the meantime, utility demand [for HSFO] is coming off. I think bunker incremental quantity is less than power generation losses on the HSFO front," a Singapore-based trader said.

With quicker turnaround times at Chinese shipyards and lower costs of scrubber installations compared with pre-International Maritime Organization 2020 regulations limiting sulfur in ships' fuel oil, vessels consuming cheaper 500 CST and 700 CST grades present stronger economics and shorter payout periods for shipowners to breakeven.

The global scrubber-equipped fleet is expected to grow by 6% on the year to 5,095 in 2023, and rise to 5,241 in 2024, according to classification society DNV's Alternative Fuel Insights.

The spread between Singapore 0.5% sulfur marine fuel oil and benchmark HSFO cargo prices -- called the Hi-5 spread -- has narrowed 13% so far in 2024. Platts, part of S&P Global Commodity Insights, assessed the spread at $127.56/mt on Jan. 9 after averaging $147.48/mt in 2023, compared with an average of $261.09/mt in 2022.

"Temperature and volatility of other related commodities like natural gas will also impact HSFO market. Ongoing geopolitical tensions will potentially reshape trade routes therefore impact the bunker demand," said S&P Global's Asia Oil Analytics Manager Wang Zhuwei.

China outlook

Chinese independent refineries increasingly import fuel oil to compensate for a feedstock shortfall after the government tightened crude import controls despite improved refining margins.

China has set its 2024 fuel oil import limit at 20 million mt, up from 19.2 million mt for 2023, according to a policy document from the Ministry of Commerce.

The Chinese government issued 176.82 million mt (1.3 billion barrels) of crude oil import quotas to 33 refineries for full-year 2024. This was the first time Beijing awarded the quotas to meet annual limits in January, giving the refiners sufficient flexibility to import crude oil throughout the year.

This could put a lid on China's imports of fuel oil in 2024, capping consumption from a major market in Asia, while the region continues to grapple with abundant supplies.

"Surely, some of the Russian barrels would continue to go to China," but the outlook is not very clear yet, a trader said.

"Chinese refineries might be keen to import more HSFO if cracks come off from prevailing levels," a China-based fuel oil trader said. "They can store these cargoes even if there's no immediate consumption need because refiners are prudent about drawing down their limited crude quotas."

Scrubber adoption finds downstream support

Potential upsides for HSFO margins in the downstream market in 2024 appeared limited in the near term despite healthy scrubber uptake anticipated for the longer term, traders said, as sellers have been wary of intense competition that pressured delivered premiums for most of 2023.

In the first 11 months of 2023, HSFO sales in Singapore rose 17.6% year on year to a record 14.91 million mt, with double-digit year-on-year growth seen nearly every month in the year, effectively surpassing sales of 13.99 million mt in 2022, according to preliminary data from the Maritime and Port Authority of Singapore.

"More vessels are taking scrubbers and many vessels are coming out from Asian shipyards. It's a good sign for sellers but the market also faces a high surplus of HSFO cargoes, so premiums are not rising even though daily demand is very decent," a Singapore-based bunker supplier said.

HSFO sales as a proportion of bonded bunker fuel volumes at China's bunker hub of Zhoushan were estimated around 25%-35%, up from 2022's estimates of 20%, said bunker suppliers.

With bunker demand driving over 70% of Asia's total fuel oil consumption, the region's fuel oil demand is expected to rise by 34,000 b/d in 2024 and 4,000 b/d in 2025, according to S&P Global's latest short-term outlook.