Lacklustre bunker fuel demand has slammed the fuel oil market. Demand in Singapore in January and February was more than 0.1 mb/d lower y/y, boosting inventories above 20 mb. On top of weakness in the dry bulk sector, the container shipping segment is also struggling. The worst news for demand may be mostly baked in by now, while supply should tighten. Still, the market may need one or two months to work off the inventory overhang.
The US-China trade war seems to be a key factor here. Container rates have fallen sharply from their November 2018 highs, leading to slower sailing times, the cancellation of sailings along certain routes, and an uptick in containership scrapping, including some relatively younger vessels, indicating that shipowners are cutting capacity rather than riding out the weakness.
Such softness could not have come at a more difficult time for container groups as they are looking to impose huge price increases on customers to pay for more costly IMO compliant fuel from Q4 19. Faced with cutthroat competition, shipowners worry that they will be forced to absorb some of the increased cost of the new compliant fuels when they hit the market, a situation that could be made worse by slower-than-expected growth in global trade volumes.
Yet it is not all doom and gloom as dry bulk shipowners are getting some modest relief from their troubles as the Baltic Dry Index rose by nearly 20% from its February lows. The possible reopening of one 30 Mtpy iron ore in Brazil will help, even though the closure of another smaller mine is a reminder that the problems in Brazil are not yet resolved.
Fuel oil supplies continue to decline globally, however, amid refinery upgrades in Asia. Reliance has completed an expansion of its coker at its domestic Jamnagar refinery and new residual fuel destruction capabilities have emerged in Korean refineries. Likewise, Europe recorded sharp y/y declines in output due to the start-up of the delayed coker unit at ExxonMobil’s Antwerp refinery. The closure of Trinidad’s refinery has weighed on Latin American residual supply.
Middle East-origin fuel oil shipments to Asia have been running at higher-than-usual levels due to growing supplies from Iraq and the UAE due to higher refinery throughputs, but these should soften as temperatures in the region increase and fuel oil power generation demand rises. At the same time, flows of fuel oil from the West to Asia should moderate in March and April due to declining production and US sanctions against Venezuela that have diverted small volumes of European fuel oil to New York.
The upshot is that fuel oil markets should tread water for a month or two as the supply overhang in Singapore is digested, helped by lower inflows from the West and Middle East, and a decline in local fuel oil output. This all, of course, depends on the demand situation in the marine fuel market not deteriorating any further. Still, with straight-run fuel oil in high demand from refineries seeking heavy feedstocks and firms looking to store LSFO barrels for blending into IMO 2020-compliant fuels, on-specification HSFO will likely get tight one last time after this spring interlude—a swansong before demand heads into a tailspin sometime in Q4 19 ahead of IMO 2020.