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Fuel oil demand exceeds predictions due to Red Sea disruptions, shadow fleet expansion and increased fuel consumption

Fuel oil for ships and power plants has unexpectedly high demand. Efforts to reduce its use are more than offset by the expansion of a shadow fleet of oil tanks serving Russia and other countries, as well as longer shipping routes, since vessels avoid Red Sea.

Many shippers, instead of switching to cleaner burning alternatives like marine gasoil or low-sulphur oil, have installed exhaust-gas cleaning devices called scrubbers in order to continue using high sulphur oil. Western sanctions and attacks against shipping in the Red Sea has further fueled this unexpected demand.

Royston Huan is an analyst with Energy Aspects. He said that the fuel oil market has shown remarkable resilience. Demand outperformed expectations because of several factors such as the Middle East's still-firm demand for power generation and Red Sea shipping disruptions due to Houthi attacks.

According to the International Energy Agency’s annual report for June, while global demand for jet fuel and diesel has fallen since pre-pandemic 2019 levels, gasoline consumption is only up 1.9%. Fuel oil demand, however, will increase by 4.8% by 2025 to an average of 6.5 million barrels a day (bpd).

Demand for fuel oil exceeds expectations

The IEA predicted that fuel oil consumption would only grow 1.6% from 2019 to 2025, which is the slowest rate among all major refined fuels.

IEA analyst CiaranHealy said that the fuel oil used in power generation in recent years has outperformed expectations of the agency, largely because the summers have been hotter in the Middle East.

According to Kpler, the shipping data firm, Saudi Arabian and Egyptian fuel oil imports increased by 33% in 2024 compared to 2023 and have remained 31% higher so far in 2025 compared to 2023.

Saudi Arabia has also been a contributor to the sanctions against Russia, importing Russian fuel oil at a discount in order to export more crude.

SHADOW FLEET, RED SEA DIVERSIONS

As the conflict in the Red Sea persists, more ships are now traveling around the Cape of Good Hope rather than the Suez Canal. This is increasing fuel oil demand.

Since 2023, vessels have avoided the area due to attacks from the Houthis of Yemen, which are Iran-aligned and aim to disrupt global shipping as a protest against the Gaza war.

According to the consultancy FGE, these diversions have increased fuel demand by approximately 100,000 bpd. This is about 2% of the global bunker requirement.

The IEA, however, believes disruption to shipping in the Red Sea has given a smaller-than-anticipated boost to bunkering volumes, Healy said.

Valerie Panopio is an analyst with Rystad Energy. She said that Western sanctions against Iran and Russia are also fueling the growth of a "shadow fleet" of vessels, likely using high-sulphur oil (HSFO). These vessels are usually owned by opaque parties and lack top-tier Western safety certification or insurance.

According to industry sources, such as Lloyd's List Intelligence, and shipbroker Gibson's estimates, the shadow fleet consists of between 1,200-1,600 tankers. This represents around a fifth (or more) of the global fleet.

Based on bunker data for 2023 from the International Maritime Organization, this would mean that shadow fleet tankers consumed more than 106,000 bpd or around 2% of global consumption.

Eugene Lindell of FGE said that many of these vessels are rust buckets, some older than 15 years. They also travel long distances, increasing fuel consumption.

SCRUBBER REGULATORY AND ADOPTION CHALLENGES

The IMO 2020 regulations lowered sulphur limit for marine fuels, from 3.5% to 0,5%. This initially dampened demand for HSFO.

The widespread adoption of scrubbers - onboard systems which allow ships to burn HSFO without causing environmental damage - has led to a rebound in consumption.

According to DNV, the maritime consultancy, the number of scrubbers installed on ships will reach 6,523 in 2024. This is up from 4,348 at the end 2020.

Despite IEA forecasts that fuel oil demand will decline after 2026 and average 6.1 million bpd in 2030, opposition to IMO rules could sustain demand. Energy Aspects reported that the Trump administration in the United States has resisted IMO regulations on carbon pricing and tighter emission rules. This could delay their implementation.

Kenneth Tveter, a shipbroker at Clarksons, said that fuel oil demand would be stable until the end of this decade. Enes Tunagur is the reporter, and Alex Lawler, Dmitry Zhdannikov, and Louise Heavens are responsible for editing.

(source: Reuters)