Spot premiums for very-low sulphur fuel oil (VLSFO) cargoes in Asia surged to record highs this week, as the market expects supplies to tighten in June, industry sources said.

This is supporting Asia’s refining margins, which have been boosted from improving fuel demand as economies globally recover from the COVID-19 pandemic.

Cash premiums for 0.5 per cent VLSFO soared to $70.04 per tonne to Singapore quotes on Monday, an all-time high, Reuters data showed.

Fears of further disruption to Russian oil supply are likely to continue supporting premiums, after the European Union agreed on Monday to cut 90 per cent of oil imports from Russia by the end of this year.

This means Europe could potentially cut exports to Asia as they keep more fuel oil production for domestic use, amid a shortfall in Russian supplies to Europe.

“It’s a mix of low western arbitrage inflows due to steep backwardation and tight supply as well as continued strength in gasoil cracks leaving less for the fuel oil blending pool,” said Roslan Khasawneh, senior fuel oil analyst at oil analytics firm Vortexa.

“North Asian output has been low due to maintenance and lower runs in China but these are now coming to an end,” he added.

Fuel oil flows from the West to East Asia are pegged below 1 million tonnes in June for now, lower from 1.9 million tonnes in May, based on Refinitiv Oil Research assessments this week.

“Premiums are through the roof and gasoil is tight on components. June seems to have little components available to blend on-spec LSFO,” said a refined products trader based in Singapore, who declined to be identified as he was not authorized to speak to the media.

Stronger gasoil cracks incentivise refiners to produce more distillates instead of allocating supply to the fuel oil blending pool.

Refining profit margins for the benchmark 10 ppm gasoil grade in Singapore were at a more than three-week high of $43.50 a barrel over Dubai crude during Asian trading hours on Monday.

The gasoil cracks, which have surged about 20 per cent in the last two weeks, were currently more than four times their five-year seasonal average for this time of the year, Refinitiv Eikon data showed.

The regional gasoil market is currently buoyed by expectations for recovering demand in China as the country eases virus-related restrictions, trade sources said.

The upcoming peak monsoon season in another key market India, however, would likely dent its domestic transportation fuel demand, leading to increased exports in coming weeks, they added.
Source: Reuters