Reduced European access to sour crude oil following the ban on Russian supply has tightened the supply of high sulfur fuel oil, supporting the long-term outlook for its value.
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Europe's access to heavy crude oil dropped sharply in December when the EU sanctioned seaborne imports of Russian barrels.
Refineries have responded by pivoting to sweeter crude grades such as light US WTI Midland, a shift which has reduced the sulfur content of residual fuels produced and tightened flows into the marine fuels sector.
Front-month HSFO crack spreads -- the spread between Rotterdam HSFO barge swaps and Brent crude futures -- have rallied steadily since October, climbing from a low of minus $36.48/b on Oct. 26 to minus $11.26/b on June 8, as assessed by Platts, part of S&P Global Commodity Insights. The five-year average is minus $13.29/b.
While there is some upside to availability levels in the second half of 2023, the outlook through 2024 was one of continued strength, sources said, as the cheapest oil product feels the effects of limited upstream feedstock.
Forward curve pricing indicated a shallow backwardation throughout 2024, with Q3 2024 crack swaps trading at minus $12.10/b.
H2 availability reprieve
H2 cracks were pricing lower into December, as an end to spring refinery maintenance turnarounds was set to boost European fuel inventories.
Greece's 180,000 b/d Motor Oil Hellas was expected to resume full operations from Q3 onwards after 40 days scheduled maintenance, while Hellenic Petroleum's Elefsis was expected to return to maximum capacity by the month-end.
Additionally, stronger refinery margins have prompted European suppliers to consider a renewed emphasis on high-sulfur production over very low sulfur (0.5%S) fuel oil, which ships can burn on the high seas without infringing international sulfur restrictions.
Early bunker sales data indicated HSFO demand stickiness in the first quarter, with sales at Rotterdam rising 14% on the year, the port authority reported. The fuel grade made up 33% of all petroleum-based fuel sales, excluding bio-blends, up from 30% in the same period in 2022.
Shipowners' appetite to burn HSFO remains uncertain, however, as firmer HSFO pricing has reduced the incentive to continue burning the cheaper fuel grade.
Under IMO regulations, vessels can continue to burn HSFO in vessels fitted with exhaust cleaning systems otherwise known as 'scrubbers'.
Typically, scrubber payback times will average around 2-3 years when HSFO is more than $100/mt cheaper than VLSFO, though relative weakness in the 0.5%S complex has kept the spread well below that level.
On June 8, physical Rotterdam 0.5% barges were pricing $86.50/mt above HSFO, up from a three-year low of $76.50/mt on June 2.
Aleksander Askeland, Chief Sales Officer at Yara Marine Technologies, pointed to cooling demand for scrubber technology in 2023.
"The scrubber market is going to stay roughly the same level for a while. We do not expect it to have any type of boom, certainly not like the one in 2019," Askeland said.
Scrubber installations are booked at shipyards months and years in advance, however, so any demand response will likely lag new market dynamics.
Sour crude supply constraints
The sour crude complex looked set to provide ongoing support to HSFO markets as recent developments have aggravated existing supply concerns.
Saudi Arabia will cut its crude output by an extra 1 million b/d for at least July on top of its existing production cuts, energy minister Prince Abdulaziz bin Salman announced June 4 in a deal with OPEC+ counterparts, under the kingdom's latest bid to reverse a tide of bearish trade sentiment and tighten the oil market.
Exports from northern Iraq via the Turkish port of Ceyhan, including all Kurdish production and volumes of federally controlled Kirkuk crude, have remained at a standstill since March 24. The blockage stems from a March 23 international arbitration ruling that an Iraq-Turkey pipeline was improperly used to transport independently marketed Kurdish crude.
Russia did not join fellow OPEC+ heavyweight Saudi Arabia in announcing further output cuts at the latest OPEC+ meeting but did agree to extend its 500,000 b/d cut from March 2023 until the end of 2024.