The fuel oil market is caught up in a soft patch. Supplies are not giving up any significant ground in key producing regions, as refiners maximise runs to capture still-strong margins, and the seasonal wind-down in maintenance from end-November will do nothing to alter this picture. September saw Asian fuel oil supply surge by 0.13 mb/d y/y and European supplies jump by 43 thousand b/d y/y, driven by rising refinery runs.
In the short term, the demand side of the equation is also facing some unexpected complications. Low-viscosity fuel oil should be strong at this time of year, as weather effects kick in, but a smog-related crackdown on thermal power generation in Pakistan, combined with hefty nuclear restarts in Japan, South Korea and Taiwan over the course of the year, has cut deeply into utility demand, causing unseasonal weakness in the Singapore viscosity spread.
Surging Middle Eastern supplies have added to the 180 cst weakness. Exports from the Middle East to Singapore have almost doubled y/y to 2 Mt since the start of Q4 17 as cooling demand in the region seasonally winds down. Domestic demand in Iraq has been particularly weak, owing to increased gas supplies from Iran—which are set to continue. Fujairah bunker demand has suffered from the flare-up in tensions between Qatar and its GCC neighbours.
But this short-term softness risks distracting from much stronger Q1 18 fundamentals. There is little or no spare capacity capable of being brought online to offset the sharp upswing in maintenance from January, while Russian and Latin American supplies will be substantially lower y/y. A new 50 thousand b/d coker in Belgium and hefty Middle East turnarounds will also make themselves felt.
The demand side is not all doom and gloom either. The macroeconomic factors underpinning bunker demand are becoming more entrenched, leading to an acceleration in the pace of growth in seaborne trade. Net tonnage transiting the Suez and Panama canals is booming, and cargo volumes handled by the big European ports are on the rise. The key Asian hubs continue to hold up well—Hong Kong bunker demand grew by 14.7% in September.
There are also still some pockets of strength in the utility sector, albeit mainly in the Middle East. Saudi Arabian fuel oil demand rebounded in September, flipping the country into a net importer of fuel oil. The decision to quickly close its 80 thousand b/d Jeddah refinery will tighten balances further. Kuwait also expects to be a net importer of fuel oil in 2018, due to the closure of the 0.2 mb/d Shuaiba refinery and the downtime associated with its Clean Fuels Project.
The bulk of autumn maintenance will soon be behind us, and existing plants are already running at extraordinarily high rates, so fuel oil supply will likely peak in December. There is only limited new refining capacity slated to come online in H1 18, beyond capacity creep and the 0.2 mb/d Nghi Son plant in Vietnam. Demand could post an 84 thousand b/d y/y decline in Q1 18, but supplies will be considerably tighter, falling by 0.43 mb/d y/y, tightening Q1 18 balances by 0.3 mb/d y/y—just before Middle Eastern demand seasonally picks up in Q2 18 for replenishment of stocks before Ramadan. So fuel oil’s current soft patch is not set to last long.