Asian fuel oil prices invert as supply disruptions and freight costs bite

Singapore’s shipping fuel market is experiencing a significant cost shock, with high-sulphur fuel oil trading above the price of the crude oil used to produce it. This inversion, driven by disrupted supplies from the Middle East and Russia, resilient bunker demand and prohibitive freight rates, marks a sharp reversal from pre-war pricing relationships. For shippers, the most pronounced impact has been on high-sulphur fuel oil, where the November crack against Dubai crude soared above $10 per barrel in mid-October. This compares with a discount of around $5 per barrel in February, representing a swing of more than $15 per barrel for a product normally worth less than its feedstock. The rise indicates that higher bunker costs are not solely due to rising oil prices, but also reflect the unusual expense of the fuel oil itself.

The regional disparity in the global fuel oil market is stark. The Singapore–Rotterdam high-sulphur fuel oil swap spread reached a record $95 per tonne on 7 October, equivalent to approximately $15 per barrel, before easing to $88 per tonne. In contrast, the European high-sulphur fuel oil crack has lingered around a $10 per barrel discount to Brent, while the US Gulf Coast crack has fallen below a $20 per barrel discount. This geographical premium in Singapore illustrates how heavily the shortage is concentrated in the Asian market. Supply losses are the primary driver of this premium, with Middle Eastern shipments of high-sulphur and very-low-sulphur fuel oil to Singapore averaging around 100,000 barrels per day in 2025. These volumes disappeared in April and May following disruptions to Hormuz shipping, briefly recovered to 130,000 barrels per day in July, and have since retreated to between 40,000 and 50,000 barrels per day.

Russia initially helped replace missing Gulf barrels, with high-sulphur fuel oil shipments to Singapore reaching around 180,000 barrels per day in April, above the typical 100,000 to 150,000 barrels per day imports of 2025. However, by September, these volumes had fallen to just 25,000 barrels per day as refinery disruptions caused by Ukrainian drone attacks impacted residue exports. This loss of substitute supply has left Singapore exposed to simultaneous shortages from two major sources. The two main fuel oil markets, high-sulphur and very-low-sulphur, have different supply networks. Russia and Middle Eastern producers, including Iraq, Saudi Arabia and Iran, are key sources of high-sulphur fuel oil. Kuwait supplies both grades, with its Al-Zour refinery particularly significant for very-low-sulphur fuel oil, while Brazil and Nigeria provide alternative low-sulphur supplies from the Atlantic Basin. This offers very-low-sulphur fuel oil buyers more geographical diversification, although longer voyages make these alternatives costly.

Despite supply disruptions, demand in Asia has remained resilient. Singapore sold 4.7 million tonnes of bunker fuel in September, only 1 per cent below a year earlier, compared with average declines of around 4 per cent in July and August. Within this total, consumption is shifting towards high-sulphur fuel oil, with sales rising around 10 per cent year-on-year to roughly 17.5 million tonnes in the first nine months of the year. The expanding fleet of scrubber-equipped vessels, which allows the use of sulphur-heavy high-sulphur fuel oil instead of cleaner very-low-sulphur fuel oil, helps explain why weaker very-low-sulphur fuel oil requirements do not necessarily signal weaker overall shipping demand. Longer voyages reinforce the pressure, as replacing Gulf cargoes with supplies from the US Gulf Coast or West Africa increases sailing distances and fuel consumption. Avoidance of insecure bunkering locations also redirects purchases towards Singapore, creating a costly feedback loop where disrupted trade requires more shipping, while the fuel needed for longer journeys becomes harder to source.

China adds another layer of complexity to fuel oil markets. Its high-sulphur fuel oil imports reached 3.3 million barrels in October so far, recovering from a total of just 300,000 barrels in June, although still below March’s 9.4 million barrels. Much of this demand is driven by Shandong’s independent refiners, which use suitable fuel oils as alternative feedstocks when crude import access is constrained. This spurt of autumn demand is expected to decrease into November and December given the recent price trend. Higher high-sulphur fuel oil premiums erode the advantage of processing fuel oil, particularly after taxes, freight and conversion costs are included. Chinese buying behaviour will therefore limit the rising demand trend by weakening as prices rise, though purchases will not disappear altogether, as individual refiners’ crude access quotas and product margins will still determine their economics.

Normally, Singapore’s premium would attract more Western supply, but freight is obstructing that adjustment. The Mediterranean–East Asia freight rate stands at $230 per tonne for a 135,000-tonne cargo, meaning transport alone costs approximately $36 per barrel for high-sulphur fuel oil or $34 per barrel for very-low-sulphur fuel oil. A year ago, the same voyage would have cost $41 per tonne, with corresponding per-barrel freight costs of just $6.50 and $6.10. These freight costs disincentivise the arbitrage created by weaker European cracks. Singapore’s estimated October very-low-sulphur fuel oil arrivals from Western markets are showing flows of 1.5 million to 1.6 million tonnes, down from 1.6 million to 1.8 million in September, as expensive shipping undermined arbitrage economics. Lower prices at the loading port offer limited relief when transportation absorbs the discount.

Recent signs of relief have emerged in the Asian fuel market. The Singapore M1-M2 time spread for very-low-sulphur fuel oil narrowed from around $38 per tonne in early October to $32 per tonne by 23 October. China’s latest 1.07-million-tonne allocation of very-low-sulphur fuel oil export quotas also increases the scope for domestic production to serve regional bunkering demand, reducing potential buying interest in the wider Northeast Asian region. Similar easing appeared in high-sulphur fuel oil, with the M1-M2 spread narrowing from a peak of $59 per tonne to $56 per tonne. This is partly due to Saudi Aramco issuing tenders for over 700,000 tonnes of high-sulphur fuel oil for November exports, to be loaded from Ras Tanura and Jubail. While Asian markets initially viewed this news with relief, there is a genuine risk of these cargoes being trapped inside should the security situation around the Strait of Hormuz deteriorate after the US mid-term elections.

Cooler Gulf temperatures in the winter should ease demand for fuel oil used in power generation, freeing up more supply for bunkering. Saudi Arabia and Kuwait use fuel oil and crude for electricity generation. However, should high freight rates persist, incremental fuel oil cargoes from Kuwait’s Al-Zour refinery could first ease shortages in Fujairah before impacting markets farther east. For now, Asian fuel oil supply remains tight, with Singapore very-low-sulphur fuel oil delivery lead times reportedly at 12 to 15 days in mid-October. Planned refinery maintenance and further disruptions to Russian supplies could slow replenishment of imports despite weaker seasonal demand. Any easing in Asia’s fuel oil tightness is likely to be uneven. Very-low-sulphur fuel oil supply has clearer prospects for growth, while high-sulphur fuel oil remains more vulnerable to Russian supply losses amidst stable demand from scrubber-equipped ships. Even if fuel oil cracks weaken over the coming weeks, prices may not fall much while crude remains expensive. Lasting relief in Singapore will require more fuel and reliable, cheaper shipping, and seasonal changes alone will not be enough.