The fuel oil shortage crisis threatens to raise global shipping costs

A shortage of fuel oil used in ships and power plants is looming during the third quarter, with refineries exposed to increasing pressure due to wars that have disrupted crude refining operations and tanker movement, prompting them to give priority to the production of diesel and other petroleum products at the expense of fuel oil.

While crude oil prices have avoided major jumps in recent months, prices for refined products have risen sharply, with refineries in Russia and the Middle East damaged by attacks, and tanker traffic choked by restrictions on navigation. China also reduced refining capacities and exports of petroleum products to avoid depleting its reserves.

Tight supplies threaten to increase costs for shipowners and power generation companies, which are already facing the fallout from war-related disruptions. An increase in the cost of bunker fuel may in turn lead to higher freight rates.

Asia is the most affected

Asia is expected to be the most affected, given its heavy dependence on Gulf supplies that were disrupted by the war with Iran.

Singapore, the largest global center for bunkering, imports more than half of its needs, amounting to about one million barrels per day, according to import data from Kpler. Rystad Consulting expects a similar path.

Energy Aspects expected the deficit in the fuel oil market to reach about 218 thousand barrels per day during the third quarter, which is the first deficit the company expects since the third quarter of 2025, when the deficit was marginal at 6 thousand barrels per day.

Valerie Panobbio, an analyst at Rystad, told Reuters: “Due to the continued supply disruptions in the Middle East, we expect fuel oil supplies to remain very tight during the third quarter.”

Fuel oil joins gasoline, diesel and jet fuel, all of which are having difficulty keeping up with demand. Diesel prices in the United States reached record levels on Friday, with renewed hostilities between the United States and Iran, along with Ukrainian attacks on Russian refineries, leading to further supply disruptions.

Refineries prefer diesel and gasoline

The trend of refineries increasing production of some other products to benefit from higher profit margins has exacerbated pressures on the fuel oil market.

For example, the Nigerian Dangote refinery, with a capacity of 650,000 barrels per day, increased its exports of diesel, gasoline, and jet fuel, while its exports of fuel oil declined, according to Kpler data.

Dangote refinery and other refineries can use fuel oil as feedstock in secondary refining units to produce other types of fuel.

Royston Huan, an analyst at Energy Aspects, said that the record decline in gasoline and diesel stocks will motivate refineries around the world to increase the operation of secondary refining units, using more barrels of fuel oil as feedstock, which will further tighten the balance of the fuel oil market.

Independently owned gasoline stocks in the Amsterdam-Rotterdam-Antwerp hub reached their lowest level in nearly five years on August 27. Distillate inventories on the US East Coast, which include diesel, also fell to a record low during the week ending August 28.

Prices jump 76% in Singapore

Inventory levels and prices already reflect the pressures on the fuel oil market. Data collected by Reuters showed that stocks are about 30 percent below their three-year seasonal averages in major centers including Singapore, Amsterdam, Rotterdam, Antwerp and Fujairah.

Longer sea journeys, which ships are forced to avoid the Bab al-Mandab Strait or the Red Sea entirely due to threats launched by Houthi militants, also lead to an increase in demand for ship fuel, according to Panobbio.

The price of low-sulfur fuel oil, the main fuel used in ships, has jumped 76 percent since the outbreak of the war with Iran, to close to $825 per metric ton, or the equivalent of about $130 per barrel in Singapore, according to data from the Zero North ship fuel price platform on September 1.

This increase exceeds the rise in the price of Brent crude, which rose 40 percent during the same period.

Russian and Middle Eastern supplies decline

Ukrainian drone attacks on the production of Russian refineries were affected, as Russia’s exports of fuel oil fell in August to a record low of 591,000 barrels per day, compared to an average exceeding 860,000 barrels per day in 2025, according to Kpler data dating back to 2017.

In the Middle East, fuel oil exports declined by 45 percent on an annual basis to an average of 447 thousand barrels per day during the period from March to August, according to Kpler data.

Refinery disruptions in the Middle East included the Al-Zour refinery in Kuwait, which is a major exporter of fuel oil. Since March, the refinery has exported only one shipment amounting to 26 thousand barrels per day, compared to about 191 thousand barrels per day in January and February.

These developments indicate that the turmoil of war is putting increasing pressure on the markets for petroleum products, not just crude, with the possibility of the rise in the cost of ship fuel being transmitted to transportation and shipping prices if supplies continue to be scarce in the coming months.

The dollar maintained limited movements during Monday's trading, despite rising bets on raising US interest rates, at a time when escalating tensions in the Middle East raised fears of expanding global inflationary pressures, which may push major central banks to tighten their monetary policies simultaneously.

The US currency was also subjected to additional pressure as a result of the shift in investor sentiment towards the yen, in addition to concerns related to increasing US debt and uncertainty about economic policies.

Currency movements were limited in early Asian trading, with US markets closed for a holiday, while the dollar faced difficulty in maintaining the short gains it achieved after the release of the strong US jobs report on Friday.

The euro rose marginally to $1.1618, while the British pound stabilized at approximately $1.3519. The dollar index, which measures the performance of the US currency against a basket of major currencies, fell 0.07 percent to 99.09 points, remaining close to its lowest level recently at 98.558 points.

Inflation decides the Fed’s decision

Traders raised their estimates of the possibility of the US Federal Reserve raising interest rates this month to about 57 percent, after the release of non-farm payrolls data, while attention is now turning to the inflation data scheduled to be released on Friday.

Elias Haddad, global head of market strategy at BBH, said that a high reading of the consumer price index “will almost decide the decision to raise interest in September, and support the strength of the US dollar,” while a lower-than-expected reading will strengthen the justifications for keeping interest rates unchanged, and expose the dollar to pressure as a result of repricing monetary policy expectations in a more accommodative direction.

He added that until the decision to raise interest rates in September is decided, he does not expect the dollar to record “new cyclical highs,” noting that the tightening of monetary policy by other major central banks limits the differences in monetary policies.

Oil increases pressure on central banks

Inflationary pressures resulting from the continued rise in oil prices constitute one of the main reasons supporting expectations of the European Central Bank raising interest rates to 2.75 percent on Thursday.

Futures also show a 75 percent chance of a further hike to 3 percent by December.

In Japan, markets are pricing in a 75 percent chance that the Bank of Japan will raise interest rates by a quarter of a percentage point during its meeting on September 18, while the odds of another hike by December are about 60 percent.

The yen continues to rise

The Japanese yen extended its gains, rising more than 0.2 percent to 155.88 yen against the dollar, supported by expectations that the Bank of Japan will raise interest rates this month.

The yen's gains came after an economic advisor to Japanese Prime Minister Sanae Takaichi expected a rise in interest rates during September.

The Japanese currency jumped by more than 2 percent last week, supported by a group of factors, including the decline in trading operations based on interest rate differences, and increasing expectations of returning capital to Japan, which would support the yen.

Eric Robertson, global head of research and chief strategist at Standard Chartered, said that trading operations based on interest rate differentials were among the best performing strategies at the macroeconomic level since the beginning of the year, despite the rise in global borrowing costs, but the “recent wave of yen strength” represents a potential threat to the continued superiority of this strategy.

He added that if the yen continues to rise, this may indicate that interest rate increases in Japan and the United States are starting to prompt investors to change their asset allocation.

Other currencies and Bitcoin

In other currency markets, the Australian dollar rose 0.12 percent to $0.7208, while the New Zealand dollar settled at $0.5880.

Bitcoin stabilized above the level of $80,000, and recorded $80,145.95 in the latest transactions, after the cryptocurrency received support in the recent period as investors tended to diversify their assets away from the dollar.