LONDON/SINGAPORE, Oct 13 (Reuters): Highly sought after types of oil best suited to making cleaner shipping fuel are suddenly finding they are a tougher sell for thirsty East Asian markets, traders say, in an unintended consequence of US sanctions on a Chinese shipping fleet.
With just over two months until environmental rules are set to mandate the biggest changes to ship power in over a century, certain rare types of West African oil have soared in value but have had to be marked down due to the higher costs of transport.
The United States imposed sanctions on units of China's COSCO on Sept. 25 for allegedly ferrying crude out of Iran, putting its vast fleet of oil supertankers off-limits for international companies and sending freight rates soaring.
The high prices are being shouldered by buyers especially in East Asia, several traders said, and are making the purchase of oil from key far-away export regions like West Africa less attractive just when production of the new fuels should ramp up.
"West African (oil) grades are commanding such a high premium as they are they are requisite feedstock for low-sulfur fuel oil (LSFO) barrels," said Matt Stanley, oil broker at StarFuels in Dubai.
"With the advent of IMO 2020 it is now time for these previously less fashionable grades to shine and for others to become weaker", he added.
The International Maritime Organisation (IMO) rules effective on Jan. 1, 2020, require ships worldwide to use fuel with a maximum 0.5 per cent sulfur content, in the biggest maritime fuel transition since ships moved from burning coal to oil.
But only around 1 per cent of the world's crude oil exports are heavy and sweet varieties, ideal for refining into Low-Sulfur Fuel Oil (LSFO), with West Africa providing the lion's share.
Price offerings for Angolan Cabinda, Nigerian Forcados and Congolese Djeno - all relatively heavy and sweet - reached all-time highs in recent weeks, but retreated downward again due to the new costs of shipping it as far as markets in East Asia.
"It just didn't make economic sense," said one East Asian buyer. "Demand has been there but with freight suddenly up that high, the prices can't be justified and the cargoes won't sell until they're brought down again."
Flows to East Asia from the top heavy sweet oil exporters Angola, Chad and Cameroon were already down in September to near their lowest monthly levels in years partly due to the sky-high prices, traders said.
While there is no indication that the ability of refiners to supply the market with compliant fuels has been undercut by the price pain and lower exports, reserves are not vast.
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