Asian HSFO cracks hit 14-month lows in May, lower Saudi buying seen

London (Quantum Commodity Intelligence) – Singapore HSFO cracks retreated sharply during the first-half of May, reaching lows not seen since the first-quarter of 2020, which coincided with the initial waves of the coronavirus pandemic in Asia.

Quantum Friday assessed the physical 380 CST versus August Brent futures at -$8.57/b, compared to -$6.14/b at the start of the month.

Likewise, the front-month June swap against Brent has retreated to -$8.20/b from -$5.84 on May 3 – the lowest levels since March 2020.

Market watchers cited thin demand from Saudi Arabia, plus weak fuel cracks in Europe and the US, including US Gulf cracks also at a one-year low this month.

Saudi Arabia typically steps up HSFO this time of year in preparation for the peak summer-season demand surge, as temperatures soar and power consumption to fuel air conditioning rockets.

Sources say so far May demand has been slow, with Saudi already having built up stocks in May, particularly with purchases from Europe.

Heavy fuel oil markets have generally performed well since Q1 2020, as most of the OPEC+ oil cuts have been heavier barrels with a greater yield of residual fuel.

The run-up to the IMO 2020 implementation, which mandated bunker fuel for ships at a maximum of 0.5%-sulfur (compared to 3.5%), had seen dire forecast for HSFO, with some analysts predicting cracks in the -$20s/b.

However, cuts to heavy crude production, lower refining runs and the roll-out of scrubber technology, which reduces the sulfur content of bunker fuel on board, have combined to keep the HSFO market in balance.

OPEC+ producers are planning to step up production by 1 million b/d between May and July, while Saudi is expected to resume production of a further 1 million b/d of voluntary cuts.