Analysis-Ship fuel shortage looms as refiners strained by war favour other products

A looming fuel shortage for ships and power plants threatens to exacerbate costs, as refiners prioritize other products over fuel oil due to disruptions caused by ongoing wars. While crude oil prices have remained relatively stable, refined product prices have skyrocketed, driven by strikes and curbed tanker traffic. Asia, heavily reliant on Gulf flows disrupted by the Iran war, faces the most severe impact, with Singapore importing over half its daily bunker fuel needs.

The shortage is expected to reach 218,000 barrels per day in the third quarter, with consultancy Energy Aspects forecasting the first shortfall since 2025. Refiners are diverting fuel oil to produce diesel and other products, leading to tighter fuel oil supplies. Record-low inventories of gasoline and diesel in major hubs have incentivized refiners to maximize secondary unit runs, further tightening fuel oil balances.

The price of very low sulphur fuel oil has surged 76% since the Iran war began, outpacing crude oil's 40% increase. Russian and Middle East refinery output has been crippled by attacks, with Russian fuel oil exports hitting a record low in August. The shortage threatens to raise costs for shipowners and power generators, potentially feeding into higher shipping rates.