London — As 2020 and the International Maritime Organization's tighter sulfur cap enforcement loom, physical suppliers are questioning the availability of high sulfur fuel oil at primary bunker hubs and smaller ports.

While the availability and specification of the new 0.5% fuels remains the focus of many as the IMO's 0.5% global marine sulfur cap edges closer, physical bunker suppliers want to ensure they can also provide fuel for the vessels that have scrubbers installed.

"We have had the question [regarding HSFO availability] from every charterer and we are asking the same question to the majors," a physical bunker supplier in Northwest Europe said. "We hope to know something more next year...for the moment it is quiet."

The International Energy Agency's 2018 World Energy Outlook released earlier this month said that by 2020 high sulfur fuel consumption will have dropped by 2 million b/d. "The share of HSFO in international marine bunker fuels drops from 75% today to less than 25% in 2040, all of which is used in ships equipped with scrubbers," the report said. This is below S&P Global Platts Analytics estimate that some 3 million b/d of HSFO will need to be replaced with higher quality low sulfur fuels in the bunker market.

Despite the inevitable fall in demand for 3.5% sulfur bunker fuel, suppliers and shipowners are concerned about 3.5% availability.

Trading houses expect major ports around the world, including Rotterdam, Fujairah and Singapore, to have HSFO supply, and more locally ports in the Mediterranean such as Gibraltar, Algeciras and Malta.

"The supply locations for HSFO will be the same in the Mediterranean," a fuel oil trader said.

Nonetheless, at smaller ports such as Ceuta, a Spanish enclave in North Africa, the focus will likely shift to 0.5% compliant fuel as tank storage is limited.

However, a primary issue for the HSFO market is the backwardation on the 3.5% FOB Rotterdam barge and 3.5% FOB Med cargo curve, which extends until April 2020, Platts data showed. As a result, leasing storage will remain uneconomical until 2020 and leaves HSFO availability in question until storage economics improve upon a contango structure.

TIGHT FUEL OIL BELT

Stretching the fuel oil complex to unprecedented tightness this winter is the extensive refinery upgrade program in Europe to prepare for the IMO's 0.5% sulfur cap. Refinery upgrades are expected to pick up through H2 2018 and early 2019 and the entire refined products market could see a tighter supply complex as refining capacity is taken offline.

The launch of ExxonMobil's delayed coker at the 320,000 b/d Antwerp refinery at the end of October has taken around 200,000 mt/month of fuel oil out of the market, according to trader estimates. In addition, ExxonMobil started a new hydrocracker at its 190,000 b/d Rotterdam refinery last week, it said, converting heavy products and produce base oils and ultra low sulfur diesel. The start coincided with the startup of units earlier this month following maintenance that began in August, straining the Amsterdam-Rotterdam-Antwerp region further.

Adding to the expectation of tightened supply are diminishing exports from Russia because of extensive refinery upgrade programs limiting the production of heavy fuel oil in favor of lighter products, with Novokuybishev, Achinsk and Antipinsky among others expecting to install cokers.

POWER GENERATION PULL

Saudi Arabia has been a major contributor to the pronounced tightness in the European fuel oil market due to strong buying interest over the summer for power generation. It drew some 3.5 million mt from Europe over May-August, according to data from Platts trade flow software cFlow. This purchasing pull has been sustained by the construction of nine desalination plants in the Red Sea area, boosting fuel oil demand in the winter months, with some of these units already online, according to market sources.

"As Saudi Arabia will continue to pull high sulfur fuel oil from Europe for their desalination plants, those vessels with scrubbers will have to be aware that there may be a significantly lower availability of the 3.5% sulfur fuel oil, especially as many refineries are installing cokers in order to reduce their high sulfur residual fuel output," a bunker buyer said.

Traders estimate the introduction of the desalination plants could see the monthly fuel oil draw from Europe remain between 500,000 and 1 million mt even through the winter, when demand typically dissipates as temperatures in the Middle East fall.

Fuel oil is forecast to be one of the fastest-growing components in the Middle East in the coming years, as the appetite for fuel oil-generated electricity soars. The IEA projected in its Oil 2018 report in March that Middle East demand for fuel oil for power generation will increase by 3.1% over 2017-23.

Seasonal direct crude burn slumped to a near decade low as Saudi Arabia moved towards a gas and fuel oil energy model. This comes a Saudi crude fills the void left by Iranian barrels removed from the market by US sanctions. As a result of the focus on fuel oil, HSFO burn is forecast at 400,000 b/d for 2018 but is set to rise 200,000 b/d by 2020, according to Platts Analytics, to replace direct crude burn.

But Saudi Arabia is not the only sink for fuel oil.

While many countries have switched to cleaner fuels for power generation, developing nations however are more price-focused and will likely take advantage of cheaper HSFO from 2020, in particular Iran, Iraq, Bangladesh and Russia.

--Emma Kettley, emma.kettley@spglobal.com

--Tamara Sleiman, tamara.sleiman@spglobal.com

--Eleni Pittalis, eleni.pittalis@spglobal.com

--Edited by Jonathan Fox, jonathan.fox@spglobal.com