Asia is expected to be flooded with more fuel oil supplies in 2023 as Kuwait’s new Al-Zour refinery ramps up output and as Russia diverts record volumes from Europe to the East ahead of sanctions.
Higher supplies are expected to weigh on Asia’s fuel oil prices and refiners’ margins next year amid steady demand from the ship fuelling and power generation sectors.
The 615,000 barrels-per-day Al Zour refinery, which started exporting products in November, is poised to be a major supplier of very-low sulphur fuel oil (VLSFO), commonly used for ship refuelling, known as bunkering.
“We expect VLSFO cracks in Asia to generally decline in 2023.”
Refiners’ profits from producing VLSFO from Dubai crude dropped to their lowest in more than two years in mid-December, Refinitiv data showed.
The Al-Zour refinery’s first VLSFO export sailed for Singapore in November.
“Most of Kuwait’s new VLSFO production capacity is likely to head to Asia as the region is naturally short on the product,” said Roslan Khasawneh, a senior fuel oil analyst at Vortexa.
RUSSIA
High-sulphur fuel oil (HSFO) has also come under pressure since May as Russian barrels flooded Asia after Western sanctions following their invasion of Ukraine. Asian refiners’ crack spread for the product fell to an all-time low in October. FO380DUBCKMF3
Asia’s fuel oil imports from Russia rose to a record of 736,000 bpd in October and were at 410,000 tonnes as of Dec. 13, data from Kpler showed, ahead of a complete European Union ban on Russian imports on Feb. 5.
“We anticipate that this will continue and may even increase next year as surplus fuel oil will still be produced (at Russian refineries),” said Kevin Wright, Kpler’s lead analyst for Asia Pacific.
STORAGE
In anticipation of more supplies, the backwardation in the market structure for 0.5% VLSFO has narrowed into 2023, while HSFO sank into a contango for the first half of next year, Refinitiv data showed.
Contango refers the structure when prices are higher in future months, signalling ample prompt supplies and encouraging traders to hold oil for sales later. Backwardation is the reverse when prompt prices are higher than future months.
HSFO stored onboard ships off Singapore and Malaysia have also nearly tripled from the start of 2022 to about 15.3 million barrels by December, Kpler data showed, while around 6 million barrels of VLSFO are in storage.
Macroeconomic headwinds next year could also dampen demand although China’s reopening will provide some support, analysts said.
Marine fuel sales at the world’s top bunkering hub Singapore were at 43.75 million tonnes in January-November 2022, data from the Maritime Port Authority showed, unlikely to breach 2021’s volume of 49.99 million.
