The premium that delivered low sulfur bunker fuel in Shanghai commands over Singapore has narrowed sharply to average just over $3/mt to date in the second quarter, increasing the attractiveness of Chinese ports to ships that usually refuel in the city-state, market sources said June 25.

The Shanghai-Singapore delivered 0.5% marine fuel spread has averaged $3.17/mt to date in Q2, down from $19.37/mt in Q1, S&P Global Platts data showed.

The slim premium means Chinese ports could potentially attract more business from ships that usually refuel in Singapore, Asia's bunkering hub, where prices are typically the most competitive in the region, market sources said.

Prior to 2020 China imported almost all its bonded bunker fuel and prices were significantly higher than in Singapore, but the introduction of a rebate of its Yuan 1,218/mt consumption tax and 13% value added tax on domestically produced fuel oil effective February 1 has increased local production, market sources said.

The country in late April issued a 10 million mt fuel oil export quota to domestic refiners Sinopec, PetroChina, Sinochem, CNOOC and Zhejiang Petroleum & Chemical for the supply of tax-free domestically produced low sulfur fuel oil for bonded bunkering at Chinese ports. Market sources said it is understood a second batch may be issued if demand requires.

China earlier this week also further developed its low sulfur marine fuel market with the launch of low sulfur fuel oil bonded bunker futures contracts on the Shanghai International Energy Exchange on June 22.

Priced in yuan, the contract allows international participants to trade tax-free 0.5% sulfur bunker fuel oil for physical delivery at INE's bonded storage facilities, with viscosity between 100 CST to 380 CST.

Domestic refiners now have the capacity to produce 18.1 million mt of LSFO in 2020, which would make the country self-sufficient in the fuel, an official with state-owned giant PetroChina said.

China's bonded marine fuel market is estimated at about 12 million mt/year.