Dirty ship fuel is getting a boost from Beijing and hot weather

High-sulfur fuel oil markets are getting a boost as Chinese private refiners hunt for more straight-run fuel oil to use as a feedstock, and a sweltering summer in the Middle East raises demand from power generation.

Beijing’s scrutiny of crude purchases by independent refiners, known as teapots, has them looking for alternatives such as SRFO, which can be processed into a range of oil products. Saudi Arabia, the United Arab Emirates and Kuwait—where fuel oil is sometimes used to generate electricity—are all experiencing hotter-than-normal weather that’s boosting power demand.

Singapore 380cst HSFO, used mainly as a shipping fuel, was at a $6.29 a barrel discount to Dubai crude at 3:03 p.m. local time, narrowing from almost $9 in mid-May. The so-called crack, a proxy for the region, could go to as low as a $5 a barrel discount by August, according to industry consultant FGE.

Chinese authorities have cracked down on the trading of quotas for buying crude and imposed a new tax on bitumen mix imports, reducing the feedstock options for refiners and driving oil imports to a five-month low in May.

Some teapots have already bought SRFO, which can be used to produce everything from diesel to fuel oil, for mid-June to August arrival, and the buying will tighten the market. HSFO in floating storage near Singapore plunged 57% to 203,000 tons in the week through June 9, according to data and analytics firm Kpler.

HSFO used to be the most common ship fuel, but under international rules introduced at the start of 2020 it can now only be burnt by vessels with pollution-reducing scrubbers.

In the Middle East, rising crude prices and supply constraints due to OPEC+ output cuts are boosting the attractiveness of HSFO as an electricity feedstock, according to Eugene Lindell, an analyst at JBC Energy. HSFO cracks should reverse their current trajectory, however, from September, he said. They could near a $10 a barrel discount toward year-end due to rising supply and increased availability of residue-rich crude, Lindell said.