China’s Zhoushan VLSFO prices lag crude gains

Bunker fuel prices for very low-sulphur fuel oil (VLSFO) at China’s largest bunker port of Zhoushan have lagged crude gains so far in 2021 because of rising domestic refinery supplies, which is increasing competition for market share as supply outpaces demand.

Zhoushan’s VLSFO bunker prices rose by 19% during 4 January to 18 February to around $508/t, with the front-month Ice Brent crude settlement rising by 25% to nearly $64/t over the same period. Zhoushan’s VLSFO prices also lagged gains in Singapore, where VLSFO bunker prices moved up by 23pc during the same period to $513/t.

Stronger VLSFO margins in Asia-Pacific, coupled with China’s release of 5mn t (32.25mn bl) VLSFO export quotas for 2021, have encouraged Chinese refineries to produce more VLSFO at the expense of gasoline.

VLSFO margins in Singapore against the front-month Ice Brent contract have been catching up with gasoline crack spreads — or the product’s premium to front-month Ice Brent crude — since January, even exceeding them on 8 February (see graph). They fell back below gasoline crack spreads later, but unstable gasoline demand means there is a high probability of VLSFO margins exceeding gasoline crack spreads again in the coming months, market participants said.

Bunker suppliers want to stock up on VLSFO ahead of the peak Chinese refinery turnaround period in April, with bunker fuel demand expected to pick up further following the end of the lunar new year holiday as vessel traffic resumes. But with supply outpacing demand there is added pressure on suppliers to make bunker fuel sales in the short term, as reflected in the competition for bunker enquiries in Zhoushan, which is weighing on prices.

Traded spot volumes of VLSFO in Zhoushan averaged around 3,100 t/d in January but have fallen to about 2,990 t/d so far in February, based on spot deals captured by Argus.