Dirty Fuel’s Big Comeback: HSFO Prices Spike as Ships Reroute from Red Sea Risks

(Bloomberg) —

One of the dirtiest corners of the global oil market is staging a spectacular rally, boosted by surging demand from ships sailing longer voyages to avoid unrest in the Middle East.

The relative price of shipping fuel with a high sulfur content, an undesirable and pollutive contaminant, strengthened sharply in recent weeks, according to data compiled by Bloomberg. At one of the world’s biggest bunker refueling hubs of Singapore, so-called high-sulfur fuel oil prices soared more than a widely referenced crude benchmark in the region, signaling bullishness.

HSFO was at a discount of about $1 a barrel to Dubai crude prices on Wednesday afternoon in Singapore, Bloomberg fair value data showed, compared with an $11 discount in early-September.

Since industry standard IMO 2020 was implemented at the beginning of the decade, more and more ships have installed pollution-reducing equipment, or scrubbers, allowing them to continue burning HSFO rather than switch to low-sulfur varieties. Additionally, refueling demand at hubs such as Singapore has received a shot in the arm from widespread rerouting of vessels away from the Red Sea since late-2023, causing ships to sail longer voyages and refuel more in the city-state. 

On the supply side, the availability of HSFO has also been shrinking as newer refineries in China and the Middle East upgrade sludgier and heavier oils to cleaner fuels such as gasoline and diesel. Some supply tightness can also be attributed to lower flows from refineries, said Arne Lohmann Rasmussen, head of research at A/S Global Risk Management.

So-called backwardation for HSFO also soared to about $20 a ton, data showed, from about $2 in early October. When markets go deeper into backwardation, prompt contracts of an asset — HSFO in this case — rallies compared with later-loading cargoes, indicating strong demand for near-term supplies and market tightness.

It’s a similar story in northwest Europe, where HSFO backwardation for months one and two is currently above $20 a ton, having strengthened significantly since around the start of the month, according to fair value data compiled by Bloomberg.

In Singapore, sales for high-sulfur marine fuel oil for the first three quarters of 2024 are about 25% higher than the same period last year, according to official data. The nation has been one of the biggest beneficiaries of ships avoiding the Red Sea and taking the longer route around South Africa, a move that has caused more vessels to transverse the Indian Ocean and skip traditional refueling points in the Middle East. 

© 2024 Bloomberg L.P.

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