The spread between High Sulfur Fuel Oil (HSFO) and Low Sulfur Fuel Oil (LSFO) serves as a key barometer in the global shipping and refining markets. It reflects the interplay of supply-demand fundamentals, regulatory shifts, and broader crude oil trends. The implications are particularly pronounced for vessels equipped with exhaust gas cleaning systems, or scrubbers, which enable compliance with emissions regulations while continuing to use the often cheaper HSFO. For these ships, fluctuations in the HSFO/LSFO spread directly impact operating costs and profitability, making it a crucial metric to monitor.
As of now, the Singapore HSFO/LSFO spread is holding around $80 per metric ton (mt) on the forward curve. Determining whether to buy or sell depends on an array of factors, including supply conditions, positioning risks, and market sentiment. By assessing these elements, traders can better navigate potential price shifts and make more informed decisions.
LSFO remains well-supplied due to strong production from Middle Eastern and Chinese refiners. Facilities such as Kuwait’s Al-Zour refinery and continued LSFO exports from China contribute to an abundant supply. If this trend persists, LSFO prices may remain under pressure, keeping the spread tight. The demand for HSFO, driven primarily by ships equipped with scrubbers, has stabilized. While many vessels have already installed scrubbers, the rate of new installations has slowed. This trend suggests that additional HSFO demand may not significantly widen the spread.
Heavy sour crude supply remains somewhat constrained, supporting HSFO margins. A potential relaxation of OPEC+ supply cuts or increased Venezuelan exports could make HSFO cheaper, possibly widening the spread. However, for now, supply remains controlled, limiting this effect. The summer months typically see higher LSFO demand for power generation in Asia and the Middle East. This seasonal uptick could exert downward pressure on the spread, particularly for near-term contracts. Traders should factor in these cyclical patterns when positioning their trades.
A widening spread scenario could be driven by a rebound in crude oil prices or supply disruptions reducing LSFO availability. With current forward levels already pricing in some widening from previous ultra-low levels ($30–50), a significant rebound beyond $150 remains unlikely unless there is a major supply disruption. A long position could be justified if HSFO cheapens due to increased sour crude availability or if LSFO supply unexpectedly tightens.
A narrowing spread appears more probable due to persistent LSFO oversupply and stable HSFO demand with limited upside. Given the current fundamentals, the spread could drift toward $50–70/mt rather than increase significantly. Traders with a bearish outlook may consider selling the spread, anticipating continued LSFO oversupply and steady HSFO demand.
The HSFO/LSFO spread is expected to remain in a moderate range of $50–100/mt rather than surge dramatically. With ample LSFO supply and no immediate HSFO shortage, the spread could narrow further to $50–70/mt, making a sell position at $80 a reasonable short-term strategy. If OPEC increases heavy crude supply or LSFO inventories tighten unexpectedly, the spread could spike above $100/mt. This scenario would be detrimental to a short position.
The HSFO/LSFO spread is unlikely to see extreme movements in the near term, with fundamentals suggesting a moderate range between $50 and $100/mt. For traders looking at short-term positioning, a potential narrowing of the spread could present an opportunity, especially if LSFO supply remains ample. Over a longer horizon, the spread may stabilize, barring any significant disruptions in crude flows or refining patterns. A measured approach, possibly incorporating a sell on rallies strategy near the $90–100 mark, could help manage risks while taking advantage of market shifts. Keeping an eye on evolving supply trends and regulatory changes will be key in refining trading strategies over time.
