LAUNCESTON, Australia: While the potential loss of Iranian crude is keeping the oil market on its toes, traders seem to be relaxed about the impact on other parts of the barrel, with Asian fuel oil particularly at risk.
The discount of benchmark 180 centistoke fuel oil in Singapore to Dubai crude has widened 21 percent in the past week to $4.68 a barrel.
The reason cited by traders is the build up in onshore inventories in the city state to a two-week high of 19.231 million barrels, as well as expected heavier imports from Europe in coming months.
On the face of it, rising inventories and more cargoes are a recipe for weaker fuel oil cracks, especially when the less-than-stellar outlook for the global economy, and hence fuel demand for shipping, is factored in.
But this ignores several factors that are likely to tighten Asia’s fuel oil markets in coming months, and by more than any influx of cargoes from the West can offset.
So far, Iranian shipments of fuel oil don’t appear to have been disrupted as much as those for crude oil, and in some ways are slipping under the radar of Western sanctions against the Islamic republic’s nuclear program.
Barclays Capital estimates that Iran ships some 500,000 tons a month of fuel oil, about 8 percent of the total sent to East Asia.
However, this could dry up if Western moves to prevent banks and insurers from dealing with Iran are successful in stopping the movement of tankers because of a lack of insurance and difficulties in settling payments.
At the same time, Barclays believes Saudi Arabian fuel oil consumption may rise in the northern summer as the kingdom tries to limit the direct burning of crude during the peak summer electricity demand.
Saudi Arabia, along with the Western world, would likely rather keep as much crude on the market as possible than worry about tightening fuel oil supplies in Asia.
Saudi Arabia could become a net fuel oil importer over the summer, instead of being an exporter of around 775,000 tons a month, Barclays estimates.
Taken together, this implies a loss of almost 1.3 million tons a month of fuel oil in Asia, equivalent to about 8.71 million barrels, which in turn represents 45 percent of current Singapore inventories.
If Saudi Arabian and Iranian supplies do dry up, it doesn’t take much to see that fuel oil cracks may once again head higher, and may even reach a premium to crude, as they did briefly at the beginning of January. And that’s just the supply side of the fuel oil equation, with the demand side also showing a few bullish factors.
One is continuing demand from Japan, which will remain strong as the country heads into summer and its last nuclear unit goes offline later this week.
Japanese utilities are already predicting power shortages during the summer peak, and with little chance of any nuclear units being restarted in coming months, thermal demand is going to remain robust.
Given the high cost of natural gas in Asia relative to coal and fuel oil, it’s reasonable to expect that the Japanese will run their fuel oil units as hard as they reasonably can.
Fuel oil demand in Japan was 10.39 million barrels in February, a 205 percent increase from the year earlier month, while power demand was up 2.7 percent in April, the third month of year-on-year gains as the country recovers from last year’s March earthquake.
In China, fuel oil demand from small, private refiners, known as teapots, may also recover in coming months.
The recent drop in fuel oil cracks may spur increased imports, and teapots may see better refining margins from higher retail fuel prices and rising demand over summer.
China’s fuel oil imports rose to 2.66 million tons in March, up from 2.5 million the prior month and a gain of 78 percent from the 2011 low of 1.49 million tons in September.
While fuel oil cracks may not improve over the short term, if by July there are signs that Iranian cargoes have left the market, the risk becomes that the residue may once again trade at a premium to crude.
— Clyde Russell is a Reuters market analyst. The views expressed are his own
Asia fuel oil market may be too relaxed
