Fuel oil prices have smashed through historic records and broken away from crude oil benchmarks, creating a pricing anomaly that threatens global shipping costs, "Hvylya" reports, citing Bloomberg.
Brent crude currently hovers at around $100 a barrel. Under normal market conditions, fuel oil prices would track slightly above that level after accounting for refining margins. Instead, fuel oil is trading at $140 a barrel in Singapore - the world's most important ship refueling hub - and nearly $160 in Fujairah, a major bunkering port near the Strait of Hormuz. Certain grades meeting tighter environmental standards fetch as much as $175.
The traditional relationship between crude and fuel oil has "broken," according to Bloomberg. Traders in the market are quoting prices valid for just a few minutes, on a "take it now or miss out" basis - a sign of extreme tightness rarely seen in the fuel oil market.
The disconnect has a clear cause: the closure of the Strait of Hormuz has severed flows from Persian Gulf refineries, which produce roughly 20% of the world's internationally traded fuel oil, the International Energy Agency estimates. The problem is compounded by crude chemistry. Arab Light, Saudi Arabia's flagship grade, yields about 50% residue - the raw material for fuel oil - compared with just 33% from a barrel of West Texas Intermediate. Even when Asian refiners source alternative crude from the US or Russia, they get less fuel oil output per barrel.
The world has already exhausted its primary defenses against the oil shock: bypassing refineries and tapping strategic petroleum reserves. Going forward, only demand destruction through higher prices can bring consumption in line with available supply. Vincent Clerc, CEO of AP Moller-Maersk, confirmed that the shipping industry is "starting to organize ourselves to transfer stocks from one continent to another and continue operating."
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