Escalating hostilities in the Middle East have tightened the near-term supply outlook, driving up the Singapore high-sulphur fuel oil (HSFO) prompt-month time spread to around a six-month high on 14 September.
The September-October time spread hit $55/t in backwardation on 14 September, more than doubling from $24.75/t a week ago and its highest level since mid-March, after the US-Iran war started at the end of February. The HSFO October-November time spread also surged to $42.25/t in backwardation on 14 September, from $14.50/t a week ago and marking a four-month high.
This comes after state-owned Saudi Aramco shut its 7mn b/d East-West crude pipeline last week, Saudi Arabia's primary conduit for exporting crude since the start of the US-Iran war. Yemen's Iran-backed Houthi rebels also captured the Red Sea port city of Mocha last week, further strengthening their influence over the strategically important Bab el-Mandeb shipping route.
These have bolstered concerns of disruptions in HSFO exports from Saudi Arabia. Most HSFO exports from its Red Sea ports typically head north instead of transiting the Bab el-Mandeb strait, but recent developments could still tighten global HSFO supplies, pushing up Asian prices. About 150,000t of HSFO was shipped from Red Sea ports in August, with the cargoes all destined for Egypt's Ain Sukhna, data from global trade analytics firm Kpler show. Market participants also noted that further disruptions to crude supplies will nevertheless have an impact further downstream when Asian refiners face a feedstock crunch, weighing on refinery runs and fuel oil production.
The strikes on vessels in the strait of Hormuz also continue to drive up HSFO supply risks, further undermining confidence in transit through the strait. For example, market participants are now unsure if loadings will still proceed for Saudi Aramco's latest HSFO sale. It recently awarded a tender to sell HSFO on a dap Singapore basis, for loading over 10-20 September and 21-30 September from Jubail. This could be its first time offering this delivery option, market participants said.
This is in addition to last week's strike on the New Andros, a tanker carrying Iraqi HSFO, according to market participants. Iraqi state-controlled refiner Somo had previously offered HSFO via ship-to-ship transfer from floating tanks via a tender, with the document naming the New Andros as one of the designated vessels. The status of the ship could not be confirmed, but traders suggested that the damage could be minor and the cargo is intact. Somo has also recently started offering HSFO for loading near Oman's Sohar terminal, outside the strait of Hormuz, with the first such cargo to load in September, and participants are watching to see if the cargoes make it through.
No respite in sight
Meanwhile, alternative HSFO sources remain limited. Volumes from key supplier Russia remain constrained by the ongoing conflict there, with exports continuing to fall in August.
Volumes were at around 610,000-625,000 b/d in August, Kpler and Vortexa data show, much lower than the 900,000-1mn b/d a year earlier. Russian exports are likely to remain under pressure if Ukrainian forces continue to target Russian refining infrastructure. US president Donald Trump claimed on 15 September that Ukraine has consented to his request to stop attacking Russian energy infrastructure, but whether this materialises remains to be seen.
On the demand side, Chinese refiners have also become increasingly interested in using high-sulphur straight-run fuel oil (HSSRFO) as feedstock, given crude shortages and high crude prices. Chinese HSSR demand could be at around 500,000-700,000 t/month in July-August, according to estimates from market participants, with one suggesting this could even rise up to 1mn t/month in October.
Overall, the recent rally in HSFO time spreads reflects growing concerns over the availability of prompt cargoes as Middle East supply risks escalate and Russian exports remain constrained, while Chinese feedstock demand stays firm. But the HSFO east-west spread has also been widening, which could signal the arrival of more arbitrage volumes into the fourth quarter, likely from Latin America.
