Silver surfer

Published at 10:44 22 Dec 2017 by . Last edited 15:12 5 Nov 2018.

Fuel oil markets remain uninspired despite some recent positive news out of Asia. South Korea suffered renewed nuclear power disruptions while the Indian courts lifted a ban on using of petcoke as feedstock. The market is well supplied in the near term, with inflows of West of Suez fuel oil into Singapore set to surpass 4 Mt this month for the first time since August, while shipments from the Middle East are more than 2 Mt. Onshore fuel oil stocks are healthy, with Singapore onshore stocks marginally higher y/y and Fujairah inventories above 10 mb.

But looking just a bit further ahead, the market looks much more positive. Balances that were in surplus in Q4 17 swing back into deficit in Q1 18, largely due to a large drop in supply from both the Middle East and Asia due to planned refinery maintenance. Supply from Europe should also fall by some 80 thousand b/d y/y in Q1 18, aided by refinery upgrades in several markets including Belgium, where Total’s 0.36 mb/d Antwerp refinery will cut dirty products output. Latin American supplies remain poor while Russian upgrades continue.

Moreover, bunker demand remains solid. Transits of the Suez Canal measured by net tonnage were up by 17% y/y in November. Bunker calls at Gibraltar have soared. Singapore bunker fuel demand was also near record high levels of nearly 0.9 mb/d last month.

While Pakistan’s fuel oil demand will continue to edge lower in 2018 as the government switches out fuel oil power plants for natural gas, coal and renewables—and the recent episode whereby the government shut in 4.25 GW of fuel oil fired power plants to reduce air pollution simply underscores what lies ahead in 2018—there are other pockets of strength. Bangladesh is scheduled to start up six small fuel oil-fired power plants with a combined capacity of 0.99 GW in 2018 and should be able to offset the expected loss in Pakistani fuel oil imports.

The Mexican government had hoped to eliminate almost all of the CFE’s reliance on fuel oil in power generation by the end of 2017 through higher imports of US natural gas. Instead, fuel oil demand is on track to rise slightly y/y to nearly 0.12 mb/d this year and disputes over land rights continue to impede the completion of secondary pipelines needed to distribute the gas to power plants. These delays, which are likely to be difficult to resolve in an election year, will ensure that Mexican fuel oil consumption remains high through 2018 too.

Demand in the Middle East outside of Iraq should continue to do well too. Kuwait will be a net importer in 2018 due to the closure of the Shuaiba refinery, and likely in 2019 due to delays to the Al-Zour refinery. Saudi Arabia has backed away from plans to fully link the cost of liquids used in power generation to international prices by 2020, opting instead for a slower rate of increase. These should offset weaker balances in Iraq where rising associated gas production from its oil fields and higher gas imports from Iran have pushed fuel oil exports to a record high.

While inventories in ARA and Singapore are still elevated, European fuel oil inventories fell by nearly 0.9 mb m/m in October, to stand 8.8 mb lower y/y, and US stocks in mid-December were at the lowest since 1982. For now, high prices are attracting barrels to the pricing points to cap the upside to prices, but this is laying the foundations for further tightness down the road.

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