Northeast Asia turns to fuel oil amid tight LNG supply

A cold snap in northeast Asia has prompted utilities to turn to fuel oil for power generation as an alternative to tight LNG supplies.

The LNG supply crunch and demand surge in northeast Asian markets have raised the need for utilities to source temporary alternatives such as fuel oil for power generation. Utility firms in South Korea and Japan have entered the market this week seeking fuel oil.

Japanese and South Korean utilities have been told by the authorities in early January to cap or limit thermal power operations or source alternative power generation fuels as the cold winter weather is eating into fuel stocks, especially LNG, at a faster-than-expected pace.

Power utilities in Japan sent out enquiries this week to import fuel oil through Japanese trading firms for delivery between the second half of January and first half of February. The increase in enquiries has pushed traders to approach South Korean refiners for fuel oil that meets the specification of Japanese utilities, something that was never done last winter.

Japanese power firms usually import fuel oil with a sulphur content of 0.2-0.3pc or 1pc, but South Korean refiners do not have cargoes that match these specifications. The available supplies have mostly been blended into 0.5pc sulphur marine fuel bunkers and South Korean refiners have just enough volumes to supply to their domestic bunker market. The volumes that Japanese utilities are seeking through traders cannot be confirmed.

South Korean supplies are limited also because refiners have been operating below actual capacity, curbing residual production of any kind, traders said.

The South Korean government had also put in place plans before winter to idle coal-fired units as part of its winter fine-dust management policy, prompting utilities to import low-sulphur fuel oil (LSFO) as an alternative power generation fuel.

South Korean utilities East-West Power (EWP) and Korea District Heating (KDHC) issued spot tenders earlier this week to import 0.3pc sulphur LSFO. Both companies are importing more 0.3pc sulphur LSFO this winter compared with the last because of a shortage of LNG supplies and the restrictions on coal-fired units. EWP and KDHC have so far issued spot tenders to import close to 180,000t of 0.3pc sulphur LSFO this winter, higher than imports of 98,000t through spot tenders last winter.

Shifting priorities

The cold snap in northeast Asia may pressure supplies available for the marine fuel market.

Japanese refiners have already started prioritising high-sulphur fuel oil (HSFO) supplies for power generation over bunker needs, at least since 5 January. The same may happen with LSFO supplies.

Bunker availability in South Korea is narrowing as refiners have been producing lesser than usual for months, traders said. Delivered 0.5pc sulphur 180cst and 380cst bunker fuel prices to Tokyo and South Korea averaged premiums of $22.81/t and $36.47/t, respectively, to 0.5pc sulphur marine fuel fob Singapore cargo prices in January. This compared with $12.10/t and $23.11/t premiums in December for Japan and South Korea, respectively. The high premiums are likely being supported by tighter bunker supplies.

Leaner supplies in the region and strong demand from the utility sector also firmed the backwardation in the Asia 0.5pc sulphur marine fuel market. The backwardation, with prompt prices at a premium to forward values, in the Singapore 0.5pc sulphur marine fuel prompt-month swaps market rose to an 11-month high on 11 January. The timespread was assessed at $4/t yesterday.