Marine fuel providers face tighter supply of higher-density, low-sulphur crude oil, known as heavy sweet, for blending because of competition from refiners for the same oil as the Iran war disrupts Middle East imports, industry sources said.
The reduced availability of fuel blending components is occurring at the same time refiners are reducing low-sulphur fuel oil (LSFO) production for marine fuel because of crude shortages, which is supporting spot premiums for the residual fuel used to power ships.
Crude grades such as Dar Blend from South Sudan and Australia's Vincent and Pyrenees are typically exported to Singapore and Fujairah in the United Arab Emirates because their low-sulphur content and overall characteristics make for easier blending with other fuels to craft 0.5 per cent-sulphur fuel oil, known as very low-sulphur fuel oil (VLSFO), for ship refuelling.
Since the Iran war began on February 28, some of that supply has been diverted to refineries to make up for disrupted Middle East supply, according to multiple industry sources and ship-tracking data.
China has imported more than 300,000 tonnes (2.19 million barrels) per month of Dar Blend during March and April, up from none in February, Kpler data showed.
"As refineries are running at lower intake due to shortage of medium sour crude from the Middle East, they will need to pull in heavier crude alternatives including sweet barrels that can support maintaining runs," said June Goh, a senior analyst at Sparta Commodities.
The supply of heavy sweet crude was fairly low even before the war because of the limited output at the small number of fields where it is found.
Since the war, the oil has become more expensive, making it tough to find sufficient supply to blend and produce VLSFO this month, said a Singapore-based trader active in the market.
"The loss of medium sour crudes and (refinery) run cuts may divert heavy sweet crudes into the refinery, leaving less low-sulphur blendstock in the market," said Emril Jamil, a senior analyst at LSEG.
The run cuts will also cause refiners to prioritise distillate fuel output such as diesel and jet fuel over LSFO, reducing supply for bunkers, he said. While a surge in Brazilian imports has cooled spot VLSFO premiums from all-time highs of nearly $140 a tonne on March 18, they remained above $17, versus pre-war levels of $2.
The shortage of blendstocks may also push blenders to use unconventional oil, fuel experts said, which may cause quality issues that can damage ship engines.
"With supply constrained by Middle East tensions and disruptions around the Strait of Hormuz, the use of unconventional feedstocks is a predictable response," said Chris Turner, technical manager at Integr8 Fuels.
"This isn't an isolated lapse in quality, but a technical consequence of market stress, one we have seen repeat across every major disruption in the past decade," Turner added.
Vessels should seek clarification from suppliers regarding the blend components used, including the use of alternative feedstocks, fuel testing agency VPS said in a notice this month.
(Reporting by Jeslyn Lerh; Editing by Florence Tan and Christian Schmollinger)