It’s too soon to write off the strength in the market. Due to the drop in eastbound long-haul shipments in recent months, inflows into Singapore will be low again in August and with the US continuing to push for maximum cuts in Iranian oil exports, including fuel oil, Asian supply may continue to surprise to the downside. Moreover, geopolitical risks are rising. How long fuel oil stays strong depends on the durability of Saudi fuel oil demand: peak cooling season will soon end, though tightness could persist for a while given Riyadh’s move to stop sending its oil via the Bab-el-Mandeb strait.
The Saudi decision to halt those crude shipments will force Aramco to trim runs at its refineries on the Red Sea. And if the ban extends to cabotage movements of fuel oil from the Arabian Gulf, then Saudi Arabia is likely to increase its European fuel oil purchases to meet local demand while exporting barrels from the Gulf that were previously earmarked for local demand. Saudi fuel oil demand shot up to a near record 0.72 mb/d in May, higher m/m by nearly 0.42 mb/d, as the Kingdom’s policy of prioritising crude exports over power generation was put into action.
Given the heavy buying by Saudi Aramco in Europe in June and early July, Saudi Arabia was already going to be a net fuel oil importer, but the above disruption to Saudi oil shipping will be the most significant factor in the short-term market. We do not think private companies are going to halt sailings through the Bab-el Mandeb strait due to security risks. Saudi Arabia, however, has relied on tankers to move more than 0.4 mb/d of crude oil from the Gulf to its Red Sea ports in recent months to meet local refinery demand and deal with quality mismatches. It also relies on cabotage shipping to move around 0.4 Mt a month of fuel oil from the Gulf to Red Sea markets during the summer.
West of Suez on-spec fuel oil supply is tight. Russian yields fell below 14% for the first time in May and will keep dropping. Similarly, scheduled TARs at European refineries this autumn are already comparable to year-ago levels (over 1 mb/d of CDU capacity is set to be offline in October) and with refineries not only undertaking modifications to prepare themselves for IMO 2020, as well as testing new crudes, work is likely to take longer than expected, as we saw this spring. If so, the modest builds reported in European fuel oil stocks over the summer are likely to be reversed in the autumn, throwing the question back onto the availability of on-specification fuel in the Singapore bunker market.
Asian markets are likely to be tight for a bit longer. Singapore bunker barges soared to a more than $10 per tonne premium in mid-July to 380 cst cargo values, reflecting the consumer supply scramble. Asian imports of West of Suez material will be very low again in August and large-scale arb arrivals may not come until early October given the limited activity in European cargo markets until mid-July.
A lot depends on Saudi Arabia. If it is forced to replace its cabotage shipments with West of Suez-origin imports, the European tightness that has choked off exports to Asia will endure for much longer. With Singapore stocks down to levels last seen in 2014, the market would do well to keep a close eye on developments in the Middle East.