A trading play will pump up visible stocks in Asia in the coming weeks, but this is only a prelude to a summer of supply tightness. Onshore stocks of fuel oil in Singapore will likely rise beyond the nearly 27 mb level seen in late February, so some short-term floating storage may be needed. On the flipside, bunker fuel demand is holding up well and supply continues to decline. With Saudi Arabia emerging as a major demand centre and Middle Eastern output set to drop, the stars are aligning for another period of exceptional strength in fuel oil.
Spring looks set to be tight. Strong demand is running up against weak supply, so we have boosted our H2 17 Asian fuel oil crack forecasts by $3 per barrel. We had expected rising oil prices to derail demand later this year, but so far there are few signs that it is buckling. The biggest risk to the market may be positioning. Unlike last year, most traders are bullish fuel oil.
Demand for fuel oil from power generators in OECD Asia is falling due to rising prices, but bunker fuel demand remains strong. Singapore bunker sales rose by 58 thousand b/d y/y in January to a record 0.89 mb/d. The January strength was notable for happening during the Chinese Lunar New Year festivities, which is often a slow time for sales. But with galloping petrochemicals pricing and global PMIs showing improved strength in manufacturing, there is evidence that the world economy may be getting onto a stronger footing.
Saudi Arabian fuel oil demand continues to grow rapidly as new power plants enter service. Fuel oil demand grew by a staggering 0.24 mb/d to 0.51 mb/d in December 2016. The scale of increase underlines how the Kingdom will be a major consumer this summer and likely a net importer of fuel oil at times. Saudi demand will be further boosted by the expected start-up of the 2.64 GW Shuqaiq electricity and water desalination plant in Q2 17.
Western arbitrage inflows into Asia will likely be the highest this month since January 2016, at more than 5.5 Mt, but this level is unsustainable. Stocks that were held elsewhere are being brought into view and the drawdown in peripheral inventories will continue. Total fuel oil stocks in Europe were 9.6 mb lower y/y in December 2016 at 78 mb, while stocks in Japan and South Korea were a combined 3.7 mb lower y/y, the lowest the combined total stock level in these two countries has been in more than seven years.
High fuel oil cracks pushed up Asian fuel oil output by 0.29 mb/d y/y in January, offsetting most of the decline in FSU and Latin American supplies. Output from these regions will continue to fall y/y in H1 17 but Asian supply will soon fall. Planned refinery maintenance next month exceeds year ago levels by 0.85 mb/d and planned work in April is nearly 1 mb/d higher y/y.
Refiners are reporting greater difficulty securing heavy crude grades as the OPEC cuts and dwindling Latin American crude oil production have cut into supplies. As such, refiners have not been able to fully capitalise on the strength in fuel oil cracks. Asian yields have likely peaked already unless something changes drastically in the crude market. Indian fuel oil yields rose to 5.3% of crude runs by volume in December 2016, their highest for over two years. However, yields dipped back to 4.5% in January as heavy crude imports into India dipped.