High sulfur fuel oil prices get a boost from rising US crude exports

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Jeff Mower:

Hello, and welcome to the Oil Markets podcast by S&P Global Commodity Insights. In today's episode we will be looking at the impact of higher US crude exports on high sulfur fuel oil prices. I am Jeff Mower, director of Americas oil news, and I'm joined today by oil news editor, Binish Azhar and oil price editor, Iman Koutani.

US crude exports have climbed, jumping 400,000 barrels a day to 4.3 million barrels a day in September. That's according to S&P Global Commodities at Sea data. That jump has been driven primarily by demand to Asia. Now, as export demand has risen, so is demand for shipping fuel, boosting prices for high sulfur fuel oil or HSFO. I want to start, I think there's a lot of moving parts in this story here, but I want to start, Binish, with you, and just ask, what is driving US crude exports higher? Where are the crude exports going particularly? And this is a one-month thing, it's hard to tell if this is going to continue. I don't want to make a one-month move into a trend here, but even so, what are we seeing here recently as far as the destinations, the destinations for this US crude?

Binish Azhar:

Yeah, Jeff, thank you. Definitely Asia is becoming a top buyer for these lighter grades coming out of the US Gulf Coast, South Korea and India in particular. Barrels heading to South Korea in September hit a record high of 21.7 million barrels. That's up from 16.9 million barrels in August. It is a trend that we are seeing developing in the last couple of months, as well as exports heading to India. Amid these trade negotiations with the US administration India has promised to be buying more US crude and natural gas, and US crude exports to India climbed to 15.3 million barrels in September from 14.6 million barrels in August, which much of that is a combination of US crude and then also summary exports of Canadian origin crude. But as we see these trade negotiations settle, we are seeing more exports heading there. And in South Korea, a lot of refinery resources have said that a downtrend in Brent and Dubai price spreads have really helped their purchases of sweet grades from the US and Brazil specifically.

Jeff Mower:

So, it's helped, like open the arbitrage for US crude into South Korea. Let's talk about those agreements. It's like, I guess let's start with India. It was in February where Trump had announced in a meeting with Modi in India that India would be buying more US crude at the time. And I think people were a little skeptical at first, but we have seen that, right? And similarly, we've seen there was an agreement like you mentioned, between South Korea and the US, where the US Would be supplying more crude to South Korea. And like you said, we have seen that. I know part of the deal with India, right, is like the US is trying to get India to stop buying so much Russian crude.

Binish Azhar:

Yeah, and committing to US barrels is definitely a strategy to get them to pivot.

Jeff Mower:

And now you had mentioned on the Canadian crude exports, so just let our listeners know. When we look at total US crude exports, right, we're looking at flows from the US, but some of those flows are coming from Canada to the US Gulf by pipeline and then re-exported. You have to kind of dig through the data to find that. So, that's like four million barrels you've written the other day were re-exported of Canadian crude to India. How about to China? Have we seen any US crude exported to China recently?

Binish Azhar:

Actually, in contrast, US has not exported crude to China since February, but Canadian crude exports alternatively climbed to China to 7.9 million barrels in September. And that's just a little bit up from 6.8 million barrels in August.

Jeff Mower:

Yeah, I see. And I think a lot of that's being gone through the expanded pipeline, the Trans Mountain Express, right? I know shipments on that have came on last year.

Binish Azhar:

Yep, last May. And it was pretty gradual that decline. But now we've seen a complete drop-off in exports to China since February.

Jeff Mower:

Iman, give us an idea, so we mentioned, okay, we have this increase in US crude exports. A lot of that's very light crude, as Binish mentioned. That's boosting demand a bit for shipping fuels, which is high sulfur fuel. Maybe give our listeners a bit of background on this high sulfur fuel. How is it different from the lower sulfur fuel? I know we have environmental regulations, global environmental regulations that are lowering the sulfur of bunker fuels.

Iman Koutani:

Yeah, so high sulfur fuel oil is produced from the heaviest residues left after crude oil is distilled in a refinery. And so, because this residue isn't deeply processed or desulfurized, the result is thick, high sulfur fuel and mainly used in marine fuel bunkering and is a much cheaper option than very low sulfur fuel oil. Typically, very low sulfur fuel oil is more expensive than high sulfur fuel oil by about 70 to $100 per metric ton premium above high sulfur fuel oil, so the spread has narrowed there. But roughly about 20% of global fleet, mostly large crude carriers, container ships and bulkers continue use HSFO, so making bunkering its largest demand outlet.

And of course, since IMO 2020 sulfur cap ships equipped with scrubbers can still legally burn HSFO. So, that is what they'll mainly buy, because it is a cheaper option, especially for vessels that have longer voyages between western and eastern regions. And they have scrubbers, so their number one option would be High Sulfur Fuel Oil versus Low Sulfur Fuel Oil. But yes, high sulfur fuel oil is mainly used for marine fuel bunkering, but it is also used for secondary refining units such as Cokers, which convert HSFO into lighter products such as naphtha and gas oil.

Jeff Mower:

And right now, I mean, high sulfur fuel is a bit tight, right? Supplies are a bit tight.

Iman Koutani:

Yes. So, over the last few weeks we've been hearing HSFO tightness, especially in the Gulf Coast market. At first we were hearing that HSFO tightness was being driven by stronger bunker demand in Gulf Coast ports because increased crude vessels going from Gulf Coast to Asia driven by an open ARB. That was what we heard, I want to say beginning of September. However, we did a little more research on that and a few sources were saying that the HSFO price and paper strength, since the prices have been rising over the month, isn't mainly really tied to crude exports or shipping activity, but restricted HSFO supply streaming from lack of heavy sour crude. And just to add onto that, according to Kpler shipping data, there has been three consecutive months of a drop in rolled crude exports to the Gulf Coast. In September Gulf Coast crude imports totaled to about 3.76 million barrels compared to 4.62 million barrels in August.

Jeff Mower:

Yeah, likewise, we saw like Commodities at Sea, we ran a story on this recently that these exports to heavy crude have dropped to the US, especially exports from Mexico. I think there were some 0.5 million barrels in September, that's down quite a bit. And that's a longer term decline just as we've seen production decline in Mexico. Colombia, I think exports from Colombia were down a bit, but definitely a drop in Mexican crude. Drop in Venezuelan crude. I mean, that can be very jumpy, exports from Venezuela. It's not a lot anyway, but it was like 2.2 million barrels in September. It was kind of unchanged from August. But that's been really up and down. Recently we've seen a bit more imports from Venezuela, just because Chevron is allowed to operate under a six-month license that the US has granted them to resume operations in Venezuela. I'm curious too on the supply side too, I think it's interesting. Just longer term, if you look back, longer term there's been a lot of, I guess, rationalization of refining capacities that produced high sulfur fuel.

This comes from COVID era. We had just sort of more refineries shutting down, is that's helped tighten high sulfur fuel over time. At the same time we've had like Coking units increase, as you mentioned, that's important as far as the fuel, high sulfur fuel supplies. And we've had this rise in light-sweet crude output, right? Which has contributed to a lower supply of these sort of high sulfur residual oils.

And I also want to mention, as you were talking about imports, I think imports from Russia are important. We used to get regular imports from Russia of resid of like 300,000 barrels a day. And that was in February 2022. But because of the war between Russia and Ukraine and the sanctions on Russia the US isn't importing from Russia anymore. So, I think that's really helped to tighten things up quite a bit. The question, when you look at prices, when you look at those high sulfur fuel oil prices, what do you typically look at? What's a good indicator for high sulfur fuel oil strength or weakness?

Iman Koutani:

I look at a few spreads. The one spread that I have been recently looking at is the Gulf Coast high sulfur fuel oil Brent Crack, which is the spread between the Gulf Coast HSFO physical price and the December crude price. And as of October 6th it was at minus $3.5 a barrel and reached a 10-week high since July 29th. So, the Gulf Coast HSFO price has been inching higher, closer to the crude price, which when I see that, I think, "Okay, HSFO price is getting strong." And when you see those two prices move closer together, crude is more valuable than high sulfur fuel oil. Crude is always going to be more expensive than high sulfur fuel oil, because high sulfur fuel oil is just a cheaper option.

And another spread that I look at is the high sulfur fuel oil versus the very low sulfur fuel oil spread. That current spread between the two products is about right now $52.88 per metric ton and was last seen the scenario five years ago. Typically, like I said, the very low sulfur fuel oil price is at a premium to the high sulfur of about 70 to 100 plus dollars per metric ton. And as of now it's about $52.88 per metric ton.

Jeff Mower:

Is that because the low sulfur fuel oil price is lower primarily, or because the high sulfur fuel oil is higher? What's causing that spread to narrow?

Iman Koutani:

That spread right now is narrowing, I was going to say, most of the times it could be a knockoff effect of both. We have been hearing on very low sulfur fuel oil a lot of supply and very weak demand, so that price has been coming off. But at the same time, high sulfur price has been increasing as well. Gulf Coast HSFL price averaged about $60.92 a barrel, up 26 cents from August versus September. So, at the same time, HSFO prices are increasing and 0.5 prices have been moving down at the same time. So yes, both have been narrowing the spread. But that is a spread I look at as well, and just the general Gulf Coast HSFO price itself I look at.

Jeff Mower:

Yeah, for what I've seen, just reading our own analytics reports, I'm seeing that they're expecting a fuel to remain tight in the rest of the year, although we are seeing a bit. One thing I thought was interesting, and maybe this is a function of the price, that like Gulf Coast refiners, we're actually reducing some runs as far as the coking edge, reducing some runs of fuel oil. Not by a huge amount, but a bit. I wonder if that could be related to the higher price as well and running more crude. But as you said, heavy crude supplies are a little tight.

Iman Koutani:

Yeah, like I said, we recently heard feedback this week that a combination of heavy sour crude being tight and Cokers running at reduced rates due to refinery maintenance. Refiners are now just stockpiling HSFO presumably to have on hand when these refinery maintenances are complete.

Jeff Mower:

Oh, interesting. And I could see too, the Middle East runs fuel oil for power generation during the summer, and that should ease coming up. I think the analytics report I was mentioning expects fuel oil demand to drop a bit in the fourth quarter by 100,000 barrels a day in Asia, I think alone on softer industrial demand. So, maybe a little softer there, but still supplies are a bit tight. No, very interesting. I'm curious about looking forward at the low sulfur fuel oil, I know there's some movement on that front. You had mentioned as far as the IMO, the International Maritime Organization regulations that kicked in 2020, which by the way was really, I thought that was really interesting in 2020. Leading up to 2020, that was the story everyone was going to cover in oil, by the way. Everyone was just like, "This is it. This is what everyone's focused on."

And then COVID hit. It was like everyone forgot about, well, maybe not everyone, but it was not the story anymore, how quickly things change. But I'm curious, the IMO had agreed to a new kind of net-zero shipping framework they call it to reduce greenhouse emissions. So, they're voting on that pretty soon. This month on October 14th, 17th they're meeting on their net-zero shipping framework, and those would come into force in 2028. What have your sources been saying about that, about alternative fuels, alternative bunker fuels like methanol or ammonia or LNG?

Iman Koutani:

Alternative fuels has been a hot topic globally. You've got VLSFO blended with biofuel, methanol, LNG, and many US market participants have not been eager to transition, nor have there been any increased amount of trading liquidity, because sources do say it is a much more expensive option and suppliers do not have prompt availability on hand. So, if they don't have to, then they don't really care to initiate the change right now. But there has been increased amount of people asking us about alternative fuels. There has also been suppliers offering VLSFO blended with biofuel in Gulf Coast ports for bunkering. But like I said, they don't really have prompt availability, so there hasn't been much trading liquidity.

Jeff Mower:

I can imagine too, and I think they're waiting to see what the Trump administration has to say. And I think you can say that about a lot of parts of the economy right now in the oil industry, the US has threatened extra tariffs and port fees on countries that are supporting this net-zero shipping framework. So, we will be covering that this month. It'll be really interesting to see how the US responds, how the Trump administration responds to this IMO vote. The Trump administration sees this as a tax, because as you mentioned, the cost. And one thing I think is I'd like to point out we have this Platts global bunker cost calculator, which we'll include a link to that in the show notes, it's really cool. And I was looking at a Lago, and if you look at August, an average of August prices, you can see 380 CST, kind of high sulfur fuel oil at $439 a ton. That's an average in August.

But when you look at the 20% sustainable methanol, it's like $939 a ton. And then 100% sustainable methanol, $1,981 a ton. So, this isn't like these aren't small increases in prices, they're very steep. But to your point, it's like anything, well that's like anything that's a supply issue. You're waiting to find out if you have to supply it, what's the mandate there before you start adding those additional supplies to bring that price down. And one other thing I wanted to bring up, and just ask Binish on, on the crude front, when we talk about crude exports, I'll swing back around to exports really quick and crude production, we're not seeing a lot of production growth. And I'm going to swing back around here too on the Trump administration policies on tariffs and even the kind of push to keep prices low. What are we seeing there as far as you cover the rig data on a weekly basis? What are you hearing from the industry, Binish on, on that front on just the crude production growth from the US?

Binish Azhar:

Yeah, crude production here has been on a slowdown. And what analysts and producers are saying is that this period of prolonged lower prices is kind of finally catching up to them. Rig activity has slowed down in the last couple of months, but what that really means is that it's just stayed steady, or there haven't been really an uptick in drilling activity. Latest data is actually showing rig counts at the Permian being unchanged for a couple of weeks straight. We're seeing some decent activity from the Eagle Ford. But overall, the production outlook is that it's going to slow down as these lower prices catch up to activity, which creates kind of a unique scenario, because oil production here in the US, if it does slow down, that's mostly going to impact lighter grades since we don't produce that much heavy crude.

But we're also seeing, like you said earlier, not a lot of heavy crude being imported into the US anymore. And from places like Mexico that has to do a lot with their production. It's not the most consistent amount of production, for example, of Mexican Maya heavy crude. But in places like Venezuela where normally they're a traditional supplier for the heavy grades in the US, not only have imports from Venezuela kind of faltered, and in the past year there's been two to three months straight where we didn't see any imports of heavy crude at all. But that's not exactly why. Venezuela production has actually been increasing in the last couple of months. But there are sanctions in place for countries who do decide to purchase Venezuelan crude, and they'll face a 25% tariff on those.

Jeff Mower:

Yeah, although I think most of that's just going to China, right? I mean, not to downplay that, but that's a whole other can of worms, as they say. And we'll see. I mean, there's so much else we could cover here. I mean, I think going forward longer term, and you've been covering this, like the crude export infrastructure, kind of that increase that we were seeing a while back has been pretty much stalled. Only because, well, crude production growth has slowed down quite a bit. And we wrote about this recently. If you want to look at some interesting comments from anonymous producers, you look at the Dallas Fed survey, it was very ... The last a couple quarters there's oil companies, some of them, to be fair, are very patient like, "Hey, we'll wait out these sort of tariffs and see how things go." But there's a lot of comments from the oil industry just complaining about current conditions and how it's very difficult to grow output. So, we'll see how that goes down the road.

And then I was also going to mention too, one big thing to look at just going forward is diesel demand. Diesel is very tight right now. Diesel cracks are high. Diesel has been driving refining margins higher. And I think that's one thing that's really helping to propel these crude exports. It's like if you're a refiner overseas or in Asia or even the US, margins really come pretty good for that. WTI, MEH crude. I think as long as we see diesel remaining tight and diesel propping up those refining margins, we may see some strength there on the export front.

Anyway, I'm going to leave it at that. Thanks very much Binish and Iman for joining me. And thank you to our listeners for tuning in. If you like this episode, please be sure to leave us a rating or review on your favorite podcast player. This Oil Markets episode was produced by Jennifer Pedrick in Houston.