High sulfur fuel oil premiums in Asia surged to a record on Thursday, one of the first signs of the impact of a shift in global ship fuel rules set to occur in 2020.
The premium for 380-centistoke (cst) high-sulfur fuel oil rose to $11.63 a ton above Singapore benchmark prices on Thursday, according to Reuters data.
The surge is a result of a combination of factors. Companies reducing their holdings of high-sulfur fuel oil (HSFO) before lower sulfur mandates for ship fuel, known as bunkers, go into effect next year has caused a recent drop in HSFO inventories in Singapore, the world's biggest bunker fuel port.
At the same time, HSFO demand in the Middle East has soared to fuel power plants meeting increased cooling demand in the region. Fuel oil is a refining byproduct used primarily as a shipping fuel, with 380-cst the most common standard used on ships, and for power generation.
"Singapore HSFO markets strengthened this week on higher regional demand from the Middle East and India," said Nevyn Nah of energy consulting firm Energy Aspects.
The surge also underscores the radical shift that is coming for global fuel oil markets.
The International Maritime Organization has mandated that ships use bunker fuel with a sulfur limit of 0.5% starting in 2020 from 3.5% currently, meaning the supply of 3.5% HSFO will lose value at the end of 2019 as the market moves to low-sulfur bunker fuels.
Suppliers have already begun clearing out their HSFO inventories ahead of 2020, three trade sources said, which is creating a supply shortfall.
"Owning HSFO going into tail end of Q3 2019 will be painful," said a Singapore-based fuel oil trader.
Singapore fuel oil stocks plummeted 14% to a more than three-month low of 19.557 million barrels, data from Enterprise Singapore showed on Thursday.
Singapore typically draws fuel oil cargoes from around the world. However, traders are reluctant to accumulate new supply despite price signals that would normally incentivize shipments, with 380-cst HSFO in Singapore at a premium of $34 a tonne to Europe, the highest since November.
The premium of the front-month 380-cst HSFO swap to the second-month swap widened to a record $20.50 a tonne on Thursday, Refinitv data showed.
This backwardated structure to the market, when prices for prompt supply are higher than later months, is a clear sign of a commodity in short supply.
However, a backwardated market means shipping fuel oil long distances will cause the cargo to lose value during the voyage.
As a result, the amount of fuel oil set to arrive from the West will be 2.31 million tonnes in July, slightly higher than the 13-year low of 1.5 million tonnes in June but below the 2019 average of 2.8 million tonnes, Refinitiv data showed.
"With efforts to reduce HSFO supplies in full swing now, there will be pockets of tightness from now until the very last day of the year, when demand will take a nosedive," said Energy Aspect's Nah.