High-Sulfur Fuel Oil Margins Soar to Six-Year Peaks: What Investors Need to Know

The refining margins for 380-cst high-sulfur fuel oil (HSFO) have surged to their highest levels in over six years, reaching $12.50/barrel over Brent crude in Q2 2025—a level not seen since 2020. This dramatic rebound defies earlier expectations of HSFO’s decline post-IMO 2020 sulfur regulations, instead signaling a structural renaissance for this once-neglected fuel. Below, we dissect the drivers behind this rally and its implications for investors.

The Middle East’s Relentless Demand

The Middle East’s extreme summer heat—peaking at 45°C (113°F)—fuels a seasonal surge in power demand, with Saudi Arabia alone consuming 450,000 barrels per day (bpd) of HSFO during peak months. This demand is locked into existing infrastructure, as HSFO remains $8–$12/MMBtu cheaper than alternatives like LNG. With regional populations and industrial activity growing, this baseline has become a $12 billion annual market for HSFO suppliers.

Scrubbers: The Shipping Sector’s HSFO Lifeline

Over 5,000 vessels now use exhaust gas scrubbers, enabling compliance with IMO 2020 sulfur caps while burning HSFO. This technology creates a $200–$300 daily savings versus low-sulfur fuels, slashing payback periods for scrubber investments to just 14 months. With scrubber-equipped fleets projected to grow by 3.1% annually through 2026, HSFO’s role in maritime fuel is here to stay.

Supply Constraints Tighten the Market

• European Shortages: Rotterdam HSFO inventories fell to 1.8 million metric tons in Q2 2025—22% below the five-year average—as Russian exports shrank by 150,000 bpd due to sanctions.
• Asian Premiums: Singapore’s HSFO-to-Dubai crude spread narrowed to -$4.25/barrel, reflecting strong demand from Asian shipping and industrial sectors.

Refinery Economics Invert

The profit landscape for refiners has flipped:
- Simple refineries (without coking units) now earn $4–$6/barrel more than complex refineries by prioritizing HSFO production.
- Delayed coking economics: To justify conversion processes, upgraded products must command a $15/barrel premium over HSFO sales—a threshold many refineries fail to meet.

This shift incentivizes refiners to favor heavier, sour crude grades, which boost HSFO yields by 8–12% in medium-complex refineries.

Risks on the Horizon

• Environmental Pushback: Open-loop scrubbers discharge 45 million tons of acidic washwater annually, drawing regulatory scrutiny. Over 80 ports now restrict their use, creating regional arbitrage opportunities but long-term uncertainty.
• Decarbonization Pressures: HSFO demand may drop to 1.1 million bpd by 2035 under net-zero scenarios, but short-term margins remain robust as infrastructure lock-in and retrofit fleets delay the transition.

Conclusion: A Structural Rally, But With Limits

HSFO’s six-year margin peak is no fluke. Middle Eastern power demand, scrubber-driven maritime consumption, and supply-side constraints have created a $12.50/barrel crack spread in Europe—the highest since 2020—and Singapore’s backwardation signals tight physical markets.

Investors should focus on:
1. HSFO producers with exposure to Middle Eastern and European markets, such as Vitol and Trafigura.
2. Simple refineries like China’s Shandong “teapot” refiners, which maximize HSFO yields.
3. Shipping firms with scrubber-equipped fleets, such as Mitsui OSK Lines or Hapag-Lloyd, benefiting from cost savings.

However, the rally faces risks: geopolitical shifts, environmental regulations, and decarbonization timelines could dampen margins. For now, HSFO’s $23/mt cash premium in Singapore and $8.75/mt backwardation underscore a market where scarcity and demand collide—a profitable niche, but one investors must monitor closely.

In summary, HSFO’s resurgence is a testament to the power of infrastructure lock-in and cost-driven demand. While its long-term future is clouded by decarbonization, the next 12–18 months may offer compelling opportunities for those positioned to capitalize on this high-margin anomaly.