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Asian HSFO flows backward from East to Red Sea on Saudi Arabia demand: traders

Highlights

Over 500,000 mt of HSFO seen moving back to Middle East

Taking advantage of backhaul could save freight costs

Singapore — More than 500,000 mt of high sulfur fuel oil is expected to flow from Singapore/Malaysia to the Red Sea for July loading in a rare movement, to meet demand from power and desalination plants in Saudi Arabia, traders told S&P Global Platts July 21.

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HSFO typically flows from the Middle East to Singapore area as Singapore is short of fuel oil and the Middle East is long.

In July, however, "At least five Aframax tankers were taken to transport fuel oil from Singapore to the Red Sea," a shipping source said.

Shipping sources reported 80,000 mt Aframax tankers -- NAVIG8 PROMISE, ZUMA, BREIVIKEN, MAERSK PETREL -- were chartered by Trafigura, to carry fuel oil from Singapore to the Red Sea, for loading around July 21.

Traders said Saudi Arabia has been buying HSFO, mainly 380 CST grade, since June, to meet its demand for power plants and desalination plants. The country is expected to buy 1-1.5 million mt/month of HSFO over June-August, the traders said.

Saudi Arabia typically buys HSFO in summer from Europe and the Persian Gulf. The Persian Gulf is the supplier of fuel oil with Fujairah being the trading hub, while power plants and desalination plants concentrate on the Red Sea side in Saudi Arabia, traders said.

"But this year, HSFO supply in Europe was tight, and Singapore HSFO was cheaper. And the freight dropped," said a fuel oil trader based in Singapore.

HSFO and high sulfur straight-run fuel oil in Europe have been tight as cargoes are heading for the US, mainly US Gulf Coast, from the Baltic Sea/Europe to meet coker feed demand, market sources said. Some cargoes from the Baltic Sea that would usually go to Europe, are now moving to the US, the sources added.

Low freight rates help

"The Singapore/Red Sea freight is almost same as the Persian Gulf/Red Sea," said a fuel oil trader. The lower freight makes the arbitrage opportunity bringing fuel oil from Singapore open, traders said.

The freight rate from Singapore to the Red Sea is $480,000 to $500,000, lump sum, while that from the Persian Gulf to the Red Sea is about $500,000, according to shipping sources, even though the latter is almost half of the distance of former route.

"Traders are taking advantage of backhaul," said a shipping source.

The normal flow of dirty products -- such as crude oil and fuel oil -- is from the Middle East to Singapore, while charterers of dirty tankers can make use of the backhaul at discount rates, the shipping source added.

In addition, Asian Aframax freight rates dropped in late June amid a sharp decline in cargo volumes and an increasing surplus of tonnage in Southeast Asia and the Persian Gulf, Platts data showed.