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Asia high-sulfur fuel oil market to take a breather in strong rally

A rally in Asia's high-sulfur fuel oil (HSFO) market, boosted by lower Middle East exports and OPEC+ cuts, is expected to take a breather as Russian exports remain elevated and will ease tight supply. Tighter supply has driven HSFO spot premiums and refining margins in Asia to over nine-month highs, raising costs for shippers, utilities and refineries that use the fuel.

Asia's HSFO imports have dropped in recent weeks, with more barrels moving towards or remaining in the Middle East to meet higher power consumption in summer. Monthly exports from key supplier Middle East to Asia fell below 1.5 million metric tons in April and May, compared with more than 2 MMt in March, showed LSEG's ship-tracking data.

Ongoing output cuts by the Organization of the Petroleum Exporting Countries and its allies, a group known as OPEC+, have also tightened heavy sour crude supply from key producers such as Saudi Arabia and the United Arab Emirates, curbing refiners' fuel oil production.

The recent strength in the market will also lure more Russian barrels to the region towards the later half of the month, relieving current tightness, several traders said.

"HSFO cracks should ease from current levels as we expect Russia's HSFO exports to remain elevated at around 600,000 bpd in June," said Palash Jain, a Middle East oil analyst at consultancy FGE, noting that several Russian refining units have resumed operations after attacks by Ukrainian drones.

LSEG Oil Research analyst Emril Jamil said that while continued OPEC cuts have been supportive of the HSFO market by widening monthly backwardation and strengthening the product's margin, the market will weaken when OPEC gradually releases more supply in the fourth quarter.

Backwardation is a market structure where prompt prices are higher than those in future months, indicating tight supply. On Sunday, OPEC+ agreed to extend most of its deep oil output cuts well into 2025 but also planned to start phasing out cuts from October.

The fuel oil rally showed signs of stalling this week, with HSFO margins dipping from recent highs.

The discount for front-month 380-centistoke (cst) HSFO crack FO380DUBCKMc1 to Dubai crude widened to about $6.40/bbl on Thursday, compared with about $4 in end-May, LSEG's data showed. Chinese demand for HSFO as a refining feedstock has also retreated due to the recent price strength, said traders and analysts.

Fuel oil imports in China breached 2.2 million tons in April, their highest since at least 2020, as refiners ramped up purchases while traders brought in more shipments from Venezuela and Iran. Imports eased slightly in May to about 2 MMt, ship-tracking data from LSEG and Kpler showed.

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