HSFO Crack Spreads: A Refiner’s Gold Rush in Asia

The global energy market is undergoing a seismic shift, and at its epicenter lies Asia’s high-sulfur fuel oil (HSFO) market. Driven by structural supply shortages in the Middle East, surging bunker demand from scrubber-equipped ships, and the lack of viable low-sulfur alternatives, HSFO crack spreads—the profit margin between crude oil and refined fuel—have reached multiyear highs. This dynamic is creating a rare, multi-quarter tailwind for Asian refiners, particularly underfollowed players with exposure to HSFO. For investors, the opportunity is clear: bet on the refiners positioned to capitalize on this imbalance.

The Perfect Storm for HSFO Demand

Asia’s HSFO market is thriving on a cocktail of supply constraints and unrelenting demand.

First, the Middle East—the world’s largest producer of heavy sour crude—has become a bottleneck. OPEC+ production cuts, U.S. sanctions on Iranian and Venezuelan heavy crudes, and the shift toward lighter crude exports have slashed feedstock availability. Meanwhile, Middle Eastern power plants are guzzling HSFO at peak summer rates of 450,000 barrels per day (bpd), driven by its $8–$12/MMBtu cost advantage over LNG. This has tightened regional supplies, pushing HSFO cracks to a 17-month high in early 2025.

Second, Asian bunker demand is booming. Scrubber-equipped ships now account for over 5,000 vessels, enabling operators to save $200–$300 daily by burning HSFO instead of pricier low-sulfur fuels. Singapore’s HSFO bunker sales hit a record 54.92 million metric tons in 2024, with HSFO’s share of total bunker volumes climbing to 36.8%—a 4.5 percentage point rise in just one year.

The Underfollowed Refiners: Shandong’s Teapot Treasure

While the spotlight often shines on giants like Sinopec and ExxonMobil, the real winners are China’s Shandong “teapot” refiners—independent operators with a knack for turning structural trends into profit. These simple refineries lack complex conversion units, making them ideal for maximizing HSFO yields. By processing heavier, sour crude grades, they boost HSFO output by 8–12% compared to medium-complex rivals.

This strategy has paid off handsomely. In early 2025, Shandong refiners earned $4–$6/barrel more than complex refineries, benefiting from HSFO cracks that hit $12.50/barrel over Brent—a six-year peak. Their agility also allows them to exploit regional supply tightness: Singapore’s HSFO backwardation (a $8.75/mt premium) and Middle Eastern power demand create arbitrage opportunities unattainable for less nimble peers.

Why Now is the Time to Invest

The structural tailwinds for HSFO are not fleeting. Key catalysts include:
1. Middle Eastern Supply Rigidity: OPEC+’s focus on light crude exports and sanctions on heavy sour grades ensure ongoing scarcity. Even if production rises, infrastructure upgrades will take years to shift feedstock mixes.
2. Bunker Demand Stickiness: Scrubber fleets are here to stay, with installations growing at 3.1% annually. Even as regulators restrict open-loop scrubbers, the economics of HSFO remain too compelling to abandon.
3. LSFO Oversupply Distract, Not Disrupt: While low-sulfur fuel oil (LSFO) markets face gluts from new refineries in the Middle East and Africa, HSFO’s niche as a cost-effective bunker fuel remains unchallenged.

The Investment Playbook

The Shandong refiners are the purest play on HSFO’s rally. Their stocks, though often overlooked, offer outsized upside:
- Margin Leverage: Every $1/barrel rise in HSFO cracks adds $100 million+ in annual profit for a midsize refiner.
- Operational Flexibility: Their ability to quickly adjust crude slates (e.g., favoring Iranian or Russian sour grades) shields them from input cost spikes.
- Geopolitical Hedge: With China’s bunker hub at ZhouShan growing to 30–35% of regional sales, these firms are embedded in Asia’s energy backbone.

While specific stock symbols are not disclosed here, investors should target independent Chinese refiners with crude import quotas—a key metric of their HSFO production capacity.

Risks on the Horizon

No opportunity is risk-free. The primary threats are:
1. Regulatory Overreach: Over 80 ports now restrict open-loop scrubbers, eroding HSFO’s demand. However, this shift will unfold slowly, giving refiners time to adapt.
2. Decarbonization Pressures: Long-term, HSFO demand may fall to 1.1 million bpd by 2035 as shipping transitions to LNG or ammonia. But infrastructure lock-in ensures short-term profitability remains intact.
3. Geopolitical Volatility: U.S.-China trade tensions or further sanctions could disrupt feedstock flows. Yet, the Shandong refiners’ diversification and low-cost strategies provide a buffer.

Conclusion: Act Now Before the Rally Fades

The structural forces behind Asia’s HSFO boom—supply rigidity, bunker demand, and LSFO oversupply—are creating a multi-quarter profit surge for underfollowed refiners. While risks exist, they are manageable in the near term. For investors seeking asymmetric returns, the Shandong teapot refiners are the undisputed winners. Their stocks offer a leveraged bet on an energy market imbalance that will define Asian refining profitability for years to come.

The clock is ticking. Position now—or miss the rally.