Global fuel oil supply is shrinking while demand for the fuel from the shipping industry remains robust, suggesting further supply pain down the road.
Exports of high-sulfur fuel oil from the Middle East are running at a rate that is at least 800,000 tons a month lower than it was before the war, the head of Asian operations at Vitol said at an industry event.
“Producers are paying higher freight rates and more risk premiums to shuttle cargoes out of Hormuz, recognising the importance of oil revenues to their national budgets,” Kieran Gallagher said, as quoted by Reuters. The risk premium for those exports remains considerable, fueling uncertainty about future supply from the region.
Fuel oil is standard for the shipping industry, but recently, some refiners in Asia have started switching from crude oil to high-sulfur fuel oil as feedstock, Gallagher said, amid the disruption of Saudi exports from the Red Sea. These refiners have snapped cargoes totalling some 1 million tons for November delivery, the executive said.
Further complicating the fuel oil situation, Ukrainian drone attacks on Russian refineries have further crimped supply. Vitol’s Gallagher estimated that loss at some 1 million tons per month.
“The key lies in replacing fuel oil with crude as a refinery feedstock,” he said. However, this remains a challenge due to the above-mentioned shipping risks in the Strait of Hormuz. As a result, the premium for the fuel oil used in commercial shipping on the spot market has reached almost $50 per ton, up from $5.10 per ton in late February, Reuters reported, citing LSEG data.
High-sulfur fuel oil exports from the Middle East averaged 3.7 million tons monthly before the war between the U.S. and Israel and Iran began, according to Kpler data cited by Reuters. The hostilities in the Strait of Hormuz, however, have had a severe impact on refined fuel exports.
By Irina Slav for Oilprice.com
