Crack conundrum

Published at 09:42 25 Aug 2017 by

For much of the summer, the main worry for the fuel oil market has been the supply response due to surging fuel oil cracks. Asian fuel oil supplies likely grew y/y in July by 44 thousand b/d, as refiners raised yields, but regional demand grew even faster, by 54 thousand b/d, as bunker demand in Singapore and Hong Kong benefitted from growth in global trade. Meanwhile, the structural decline of big suppliers in the FSU due to refinery modernisation and the worsening finances of Latin American refiners are still winnowing away at Atlantic basin supplies.

With data for June available for most countries now, the scale of the global response to high fuel oil cracks is much clearer and, for that matter, more obviously inadequate. We estimate global fuel oil production fell by 0.15 mb/d y/y in June, led down by Latin America, where supplies declined by 0.14 mb/d and the Former Soviet Union, where refinery upgrades cut production by 0.1 mb/d y/y. Even though supplies grew y/y in Europe by more than 0.1 mb/d y/y, the global fuel oil supply and demand balance worsened in June as supply declined by more than demand.

The big drops in Latin American fuel oil output may begin to ease with Mexico’s Salina Cruz refinery returning from an unplanned outage, but the supply side of the market is hardly set to change course. Russian refinery upgrades continue coming onstream and operating conditions in Russia are encouraging local firms to more effectively use their conversion equipment.

Russian fuel oil output fell by 0.12 mb/d y/y in July to 0.84 mb/d as volumetric fuel oil yields fell below 15% of crude inputs for the first time ever. Heavy products yields should fall further once the 0.16 mb/d Taif refinery starts up a 54 thousand b/d vacuum residue hydrocracker and a 20 thousand b/d VGO hydrocracker in September. Indeed, the company has told traders that it intends to halt fuel oil exports as of next month. The Taif plant produced 35 thousand b/d of cracked 3.5% sulphur fuel oil in 2016, so the upgrade will cut Russian output by more than 4%.

Russian refinery upgrades have not only cut back fuel oil output but have also altered the slate of products being produced. Production of 3% and 3.5% sulphur fuel oil was 51% of total Russian fuel oil output in July, up by 2 percentage points (ppts) y/y, and 3.5% fuel oil is growing in proportion to total production, accounting for 16% of output in July, some 6 ppts higher y/y. The bulk of the declines in production are occurring in the middle range. Fuel oil with 2-2.5% sulphur content, which made up nearly 30% of production in 2015, was just 22% of output in July.

Moreover, resurgent diesel prices have widened the spread between diesel and fuel oil, improving Atlantic basin coking economics. These gains in diesel prices have helped complex refiners absorb some of the price increase in heavy crudes worldwide over the same period. Simpler refineries that might make a lot of fuel oil by running a heavier crude are likely to find themselves outbid for heavy barrels by competitors equipped with cokers. This means less fuel oil output in Europe and Asia than might otherwise be suggested by high cracks.

Broadly speaking, prices are too low. On the demand side, there is little pressure on fuel oil consumers to rationalise consumption at present, while on the supply side, prices are simply too low to incentivise large-scale production increases.

Log in to download

Other Fuel oil Outlook publications

IMO 2019

Published 3 weeks ago

2018-02 Oil - Fuel oil Outlook - IMO 2019 cover

Much of the oil market is starting to accept that the IMO 2020 specification shift for marine fue..

Read more

Putting on the Ritz

Published 1 month ago

2018-01 Oil - Fuel oil Outlook - Putting on the Ritz cover

The sudden rally in crude prices that took Brent above $70 a barrel could not have come at a wors..

Read more

Silver surfer

Published 2 months ago

2017-12 Oil - Fuel oil Outlook - Silver surfer cover

Fuel oil markets remain uninspired despite some recent positive news out of Asia. South Korea suf..

Read more


Published 3 months ago

2017-11 Oil - Fuel oil Outlook - Interlude cover

The fuel oil market is caught up in a soft patch. Supplies are not giving up any significant grou..

Read more

Coke diet

Published 4 months ago

2017-10 Oil - Fuel oil Outlook - Coke diet cover

Fuel oil has been largely treading water for the past month, but relatively high stock levels at..

Read more