Tight molecules, strong spreads: Asia VLSFO to strengthen

We remain bullish on East of Suez VLSFO through August and September as limited low-sulphur blendstocks and heavy sweet crude arrivals keep prompt balances tight and support elevated spreads and differentials. However, we expect the market to correct from October/November as summer gasoline demand fades and blending availability improves. Asian Hi-5 spreads should remain supported near current levels, although high bunker prices and slow steaming will cap further upside.

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East of Suez VLSFO fundamentals have tightened lately, with current strength likely to extend into Aug/Sep as low-sulphur blending components and heavy sweet crude arrivals remain limited. These factors are contributing to elevated blending economics as the market is on the lookout for available molecules to meet on-specs fungible low sulphur barrels.

Total component arrivals into Asia are estimated at ~850kt in July, driven by HSSRFO volumes rising to 580kt from 270kt in June. However, LSSRFO arrivals fell sharply to around 100kt from 340kt last month, while European supply dropped to just 44kt as peak summer fuel production tightened blending-component availability in ARA.

Low-sulphur crude arrivals into the Singapore hub fell 36.7% m/m to around 420kt in July, despite higher Sudanese Dar and Brazilian Atlanta volumes. While, total August heavy sweet crude arrivals into the Singapore hub are estimated at ~340kt, so far, with Brazil supplying at least 300kt

Further, compositional elements in low sulphur production are being absorbed into the gasoline and distillates pool tightening both blendstocks and fungible output. Since early July, Singapore 0.5% fuel oil has underperformed 92 RON gasoline and 10ppm gasoil as refiners maximized light and middle distillate production.

Singapore Gasoline 92 Ron vs Singapore 0.5%S VLSFO spread ($/bbl)

Source: Kpler calculations based on Argus Media

Singapore Gasoil 10ppm vs Singapore 0.5%S VLSFO spread ($/bbl)

Source: Kpler calculations based on Argus Media

The tightness is increasingly evident in Singapore’s 0.5% fuel oil structure and cargo differentials. Prompt inter-month spreads rallied to $32–34/t, up more than $10/t since the start of July, while the M1/M2 spread gained over $20/t to reach $50/t on 22 July.

Cash differentials have widened by more than $15/t since the start of July to above $30/t, while lead times have extended to 16–18 days from 7–11 days earlier in the month.

However, the forward structure points to a potential correction from Oct/Nov (M3/M4) onwards as the summer gasoline season ends, and differentials begin to soften.

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Singapore 0.5%S VLSFO market structure ($/t)

Source: Kpler calculations based on General Index pricing

This should also support Asian Hi-5 spreads at current levels as peak demand and longer voyages caused by trade-route diversions lift overall fuel consumption. However, elevated global bunker prices and increased slow steaming are likely to cap some of the upside.

Regional Hi-5 (VLSFO vs HSFO) spreads ($/t)

Source: Kpler calculations based on Argus Media

Meanwhile looking into August, PETRONAS Pengerang is offering an early-loading 500,000 bbls atmospheric bottoms. Indonesia’s exports are estimated at 110,000 tonnes comprising 94,488 tonnes of low-sulphur waxy residue (LSWR) from Balikpapan and 15,748 tonnes of decant oil (DCO) from Cilacap. Taiwan’s Mailiao is offering 11,000 tonnes of Pyrolysis Fuel Oil (PFO) and 40,000 tonnes of Main Column Bottoms (MCB), all slated to load at the tail end of next month, keeping the market on its toes.

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