Singapore — Asian high sulfur fuel oil markets are likely to come under intense pressure due to the drop in exports from Saudi Arabia following the weekend drone attacks as the leadup to the IMO 2020 sulfur cap on bunker fuel had already tightened supply in the region, traders said Monday.
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"Definitely this is going to make the [supply] situation more difficult," a Singapore-based trader at a western trading company said. "I think the Singapore bunker market could face huge supply disruptions," he added.
HSFO prices in Singapore, the world's largest bunkering port, have soared to record highs in recent weeks amid tight availability and logistical bottlenecks as the shipping industry transitions toward IMO 2020 from January 1 next year.
"I think it's quite possible that [Saudi Arabia] would now look to substitute their crude burning with fuel oil," said another fuel oil trader about a potential change in the Kingdom's fuel mix to meet its utility demand.
Of an estimated oil burning demand of 500,000-700,000 b/d, Saudi Arabia is estimated to use around 300,000-400,000 b/d of crude, with the balance of its demand met by fuel oil, traders said.
Although Saudi Arabia's HSFO exports have tapered off in recent months due to increased demand from its domestic utility and industrial sectors, it has remained a sizable contributor to meeting Asia's demand for HSFO.
Singapore's fuel oil imports from Saudi Arabia total just under 1 million mt in 2019 to date, compared with 1.82 million mt in 2018, data from Enterprise Singapore showed.
However most traders believe Saudi fuel oil imports into Singapore are considerably higher than that once Saudi oil delivered to floating storage units in nearby Malaysian waters is taken into consideration.
"It's also difficult to pinpoint how much [HSFO] they [Saudi Arabia] export is actually what they produce -- I think they buy about 1.1 million-1.5 million mt/month from Europe. They could produce another 1.5 million mt/month or so. So what they don't use for utility, they can export ... it should be at least half a million mt per month," a trader said.
SINGAPORE MARKET PRICES IN UNCERTAINTY
The likelihood of further supply disruption in the Singapore HSFO market was being priced in by the market in mid-morning trade Monday.
The market structure at the front of the Singapore fuel oil swaps curve was also seen reflecting this strength. Broking sources said the October/November 380 CST HSFO swap spread was trading at around $71/mt mid-morning Monday. This is well above the assessment at $60/mt at the 4:30 pm Asian close [0830 GMT] Friday.
Still, some traders said the full impact of the potential supply disruption had yet to be fully priced in.
"Even before this, I was expecting the premium to go up to $60-$70/mt," said the first trader, referring to the premium for Singapore 380 CST HSFO over the Mean of Platts Singapore 380 CST HSFO assessment. "I won't be surprised if October/November [380 CST HSFO spread] goes up to $80-$100/mt," he added.
PERFECT STORM FOR ASIA HSFO MARKETS
The drone attacks on Saudi Aramco's Abqaiq processing facility and the Khurais field on Saturday and the likely disruption to exports could not have come at a worse time for the Asian HSFO market as it prepares for the International Maritime Organization's 0.5% maximum sulfur limit mandate from 2020.
Singapore is one of the main suppliers of HSFO to major regional bunkering destinations like Shanghai, Hong Kong and South Korea, and the Singapore HSFO market has recorded record highs in both the physical and prompt month derivative segments in recent weeks due to a lack of availability and logistical bottlenecks.
Few traders have been keen to ship cargoes to the tight Singapore HSFO market as suppliers increasingly switch stocks to IMO-compliant fuels. Logistically both terminals and barges are also in the process of being converted for compliant-fuel operations once demand starts to pick up in earnest from the fourth quarter.
A steep backwardation and a market that is fast switching to low sulfur marine fuel has led traders to prefer shipping fuel oil from the Middle East rather than the west due to the shorter voyage time.
Singapore recorded 361,685 mt of fuel oil imports from the Middle East in the week ended September 11, accounting for 26.8% of the city-state's total fuel oil imports of 1.35 million mt in the week, latest Enterprise Singapore data showed.
"We are depending on oil from the Middle East. Iraq and UAE are significant, but Saudi is a big contributor too," a trader noted.
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