FEATURE: Kuwait Al Zour refinery's surging LSFO exports set to close Western arbitrage to Asia

An imminent surge in low sulfur fuel oil exports from Kuwait's new Al Zour refinery is set to fundamentally alter global trade flows, with ripple effects likely to be felt particularly in the European and Asian fuel oil markets, market participants said April 3-4.

Much of Kuwait's LSFO output is likely to make its way East to the world's largest bunkering hub of Singapore, rendering the arbitrage economics that have long enabled Western cargoes to arrive in Asia increasingly unviable.

The 615,000 b/d refinery has been progressively ramping up LSFO exports since starting operations late last year.

With the startup of its second crude distillation unit in early March, its processing capacity has doubled to 410,000 b/d and LSFO exports have surged to average at least 300,000 mt/month from 100,000 mt in November, when the first CDU came online.

LSFO exports are likely to double again from current levels in the coming months as operations at the second CDU ramp up, traders said.

With the startup of operations at a third CDU expected later in 2023, LSFO export volumes are expected to swell to nearly 1 million mt/month.

"We'll see less arbitrage inflows from Europe," a Singapore-based fuel oil trader said.

"There will be a displacement for sure, but there are unknowns around when the third CDU will be operational," the trader added. "Not expecting the refinery to hit its maximum production capacity so fast... the final stream would likely come online only toward the end of 2023."

State-owned Kuwait National Petroleum Company, which owns the refinery, was not immediately available for comment on the timeline for the startup of the third CDU and LSFO output once the refinery is ramped up to full nameplate capacity.

In an interview with S&P Global Commodity Insights earlier this year, Kuwait Petroleum Corporation CEO Sheikh Nawaf Saud al-Sabah said the third CDU would be up and running in the second quarter.

Half of market

At full capacity, and considering the likelihood that much of Al Zour's LSFO exports will move East, traders expect Kuwaiti supply to displace almost 50% of the current typical Western arbitrage volume of up to 2 million mt/month and meet around 40% of Singapore's typical low sulfur bunker demand of just over 2.5 million mt/month.

"I think the market has now priced in CDUs 1 and 2 running, and the East should continue to see ample supply arising mainly from Al Zour. That would also mean it will be difficult for the West-to-East arbitrage window to be open," another Singapore-based fuel oil trader said.

KPC's LSFO exports have risen progressively to 412,615 mt in March from 411,000 mt in February, 295,412 mt in January and 200,000 mt in December, Kpler shipping data showed.

Singapore imported 475,818 mt of heavy distillates from Kuwait in the five weeks to March 29, up from 295,796 mt in the preceding five weeks, latest Enterprise Singapore data showed.

"We need demand to pick up and that could only happen if the macro situation improves, global trade recovers and recession fears fade. But regarding [Al Zour's upcoming] third CDU, I'm hesitant to think the market can absorb that much supply," the first trader said.

The startup of Al Zour's second CDU coincided with a gradual uptick in power generation demand from domestic fuel oil-powered utilities, and that would likely cap Kuwait's fuel oil exports in the near term, traders said.

"The start of the second train indeed adds supplies to the market, however it comes at a time when power generation demand is picking up," said Aabha Gandhi, senior oil products analyst at Kpler.

"Some of the production will be consumed for domestic usage; this also means that exports will be curbed. We won't see the [new] supplies becoming evident at least until the end of H1," Gandhi added.

Weighing on prices

The cash differential for Singapore marine fuel 0.5%S cargo over Mean of Platts Singapore marine fuel 0.5% fell $3/mt day on day to minus $1.25/mt April 5, slipping to discount for first time since June 30, 2021, S&P Global Commodity Insights data showed.

The cash has differential has averaged 25 cents/mt to date in April, after averaging $12.01/mt in Q1 and $14.28/mt in Q4 2022, S&P Global data showed.