Asia's Russian fuel imports poised to hit all-time high due to Middle East disruption

Highlights:

• Imports rise to meet shortfall in Mideast supply
• High-sulphur markets ease after waiver but still strong
• Forward curve structure holds firmly in backwardation

Asia is expected to import a record volume of fuel oil from Russia in March after the US eased sanctions, shipping data showed as of Thursday, ahead of expected tighter supplies from next month caused by the US-Israeli war on Iran.

The influx will help to alleviate some concerns about supply tightness arising from a shortage of Middle Eastern fuel oil after the war halted fuel shipments through the Strait of Hormuz and refiners in the region halted operations.

Asia is set to receive more than 3 million tons (614,500 barrels per day) of Russian fuel oil this month, according to ship-tracking data from Kpler and LSEG.

Supply heads to Southeast Asia, China

Southeast Asia is expected to be the top recipient, with about 1.7 million to 1.9 million tons to arrive mainly at Singapore and Malaysia this month, based on ship-tracking data and traders' estimates. Most of these volumes are expected to end up as bunker supply for ships, traders said.

China is the next-largest buyer at about 1.2 million to 1.5 million tons this month. Fuel oil typically ends up at refineries in eastern Shandong province as an alternative feedstock to crude, supply of which has tightened significantly due to disruptions in Middle Eastern exports.

"The disruption in fuel oil flows has an outsized impact on HSFO supplies relative to low-sulphur fuel oil supplies, as the blockade has also curtailed medium- and heavy-sour crude flows out of the Strait of Hormuz, tightening the overall crude supply complex," said Xavier Tang, senior market analyst at Vortexa.

Washington on 12 March issued a 30-day waiver for countries to buy sanctioned Russian oil and petroleum products stranded at sea. Southeast Asia was already a top recipient of Russian fuel oil prior to the waiver, though buying had slowed after major Russian producers were sanctioned in October.

Temporary cooling

The higher Russian volumes have cooled the high-sulphur fuel oil (HSFO) market from recent highs, though analysts said the supply outlook remained tight.

Asia's spot premium for 380-centistoke HSFO hit a record of more than $76 a metric ton last week, data from trade sources showed, and it eased to around $70 after the US issued the waiver.

HSFO's market structure has also gone into firm backwardation from now until the end of the year, brokers said. Prompt prices are higher than future months in a backwardated market, indicating tight supply.

Emril Jamil, senior analyst at LSEG, said the rise in Russian inflows is insufficient to cover the loss of Middle East supply if the crisis is prolonged.

Royston Huan, senior oil products analyst at Energy Aspects, said while Russian supply can provide temporary relief for the market, run cuts at refineries across the Middle East and Asia will tighten supply.

"The Strait of Hormuz remains blocked and crude availability remains a concern, meaning the market should remain bullish overall in the coming weeks or months," he said.