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Onshore fuel oil stocks in Singapore fell to their lowest levels in four weeks for the week ending May 20, according to data released by International Enterprise.

Inventories of fuel oil dropped 466,000 barrels to 20.24 million barrels as a result of the recent decline in Western arbitrage flows as European refiners continue to slash production of fuel oil due to poor margins and demand.

The reduction in fuel oil capacity in Europe is set to lead to a further reduction in fuel oil cargoes to Asia next month. Western cargoes landing in Asia are expected to fall by 14-20 percent in May to around 3.0 million tonnes from approximately 3.5 million tonnes in April.

June and July arbitrage supplies are also likely to remain tight, below monthly average volumes of around 3.0 million tonnes.

Tight capacity in the U.S. Gulf Coast is also likely to absorb some European barrels bound for this region.

European Refineries

Western cargoes make up the largest source of supply to Asia, the largest consumer of high-sulphur fuel oil.

European refiners that have already begun to cut production of fuel oil due to poor margins include France's Total, Swiss-based Petroplus and Italy's ENI.

Total, Europe's largest refiner, has already said it will shut a quarter of its capacity at the 343,000 barrels-per-day (bpd) Gonfreville plant, the biggest in France. Overall, the company says it will close 10-20 percent of its overall 1.4 million barrels per day (bpd) of capacity at its eight refineries in France, Germany and the Netherlands.

Earier this month, Petroplus confirmed that it has shut its 117,000 barrels-per-day Teesside refinery ahead of its possible sale or conversion into a storage terminal and Italy's ENI has said it plans to sell its Livorno plant.