Asia’s fuel oil market could come under pressure in 2024 as Kuwait exports are set to rise while Russian supplies to China and India will stay elevated, traders and analysts said.

Prices of very low sulphur fuel oil (VLSFO) will hinge on exports from Kuwait’s Al Zour refinery, while prices of high sulphur fuel oil (HSFO) prices are likely to stay capped by ample supply.

Reflecting steady to more supplies, fuel oil refining margins are poised to trend lower into 2024, while backwardation is also expected to narrow, forward curve data on LSEG Eikon showed.

Refiners’ margins for VLSFO are likely to hold under premiums of $15 a barrel in 2024, while those for HSFO are expected to stay at discounts of more than $10, according to this week’s data.

Here are top factors to watch in 2024:

KUWAITI EXPORTS

Traders are watching for Kuwait’s Al Zour refinery to reach its full capacity for commercial exports next year.

Kuwaiti exports of VLSFO climbed in the first nine months of 2023 as the refinery ramped up spot sales, but the volume fell in fourth quarter after it decided to sell some production via term deals.

“Exports from Al Zour will be the major swing factor for the low-sulphur market in H1 2024,” said Ivan Mathews, analyst at energy consultancy FGE, adding that VLSFO margins are expected to fall in first quarter.

“But when power generation demand starts to increase towards the end of Q2 in Kuwait, power stations there are expected to burn more LSFO instead of HSFO, which will reduce surplus barrels available for exports.”

RUSSIAN INFLUX

Russian fuel oil exports have flooded trading hubs in Asia and the Middle East since Western countries imposed sanctions and a price cap on Russian refined products on Feb. 5 following the Ukraine war.

These exports, mostly straight-run and high-sulphur grades, will remain ample into 2024, weighing on the HSFO market, said traders and analysts.

“HSFO is still weak into January as these sensitive cargoes are ready and available in the region,” said a Singapore-based fuel oil trader.

Another trader said HSFO would soften from mid-January and beyond on adequate supply, though traders are keeping an eye on potential further sanctions on Russian oil shipments.

China and India were the top destinations for Russian fuel oil in 2023, as refiners ramped up purchases of the discounted barrels, mainly for use as feedstocks to replace crude.

China’s fuel oil imports hit the highest in a decade in June 2023, boosted by Russian oil uptake, but traders said 2024 volumes were unlikely to exceed those of 2023.

EMERGING CAPACITIES

Traders are also eyeing the progress of start-ups at new refineries, including the Dangote complex in Nigeria and coker units in Mexico, that may lead to more exports of residue fuel.

“If test runs for Dangote are successful and they run the refinery in hydroskimming mode, we will then see Nigeria producing low-sulphur straight run fuel and exporting it,” said FGE’s Mathews, adding that this would depress VLSFO margins.

Delays in start-ups at new coker units at Pemex’s Tula and Salina Cruz refineries could lead to more exports of high-sulphur fuel, analysts said.

Source: Reuters reported by Jeslyn Lerh and edited by Florence Tan and Clarence Fernandez