With IMO 2020 looming on the horizon, and question marks persisting over Saudi fuel oil demand following major electricity tariff reforms, there is limited fresh appetite for taking risk on fuel oil. But thanks to positive developments in Pakistan, Saudi Arabia, Iran and India, there is still scope for summer cracks and spreads to perform from current levels. Falling stocks and off-spec bunker cargoes in Singapore will add further upside in the near term.
Pakistan had been expected to back out a lot of its fuel oil imports this year, but delays to several new gas-fired power projects, as well as low hydroelectric generation, have forced it back into the market. Over May and June, Pakistan will import up to 1.2 Mt (0.13 mb/d) of fuel oil, compared with imports of just 0.2 Mt (14 thousand b/d) over the whole of Q1 18. This will chip away at supplies at Fujairah at a time when Singapore stocks are at least 1 Mt (6 mb) below year-ago levels.
Saudi Arabia could serve up a surprise too. Despite major electricity price increases, combined liquid fuel burn has been on the rise this year and although crude oil burn gained at the expense of fuel oil over January-February, we think that was mainly because Saudi Arabia was keeping its crude oil exports to just over 7 mb/d as refinery maintenance backed out crude. Given Saudi turnaround profiles, the displacement of fuel oil by crude burn likely continued into March and April, but with refinery maintenance at an end, crude burn should now fall back and fuel oil burn should rise.
Iran, on the other hand, is gearing up for 0.15 mb/d of refinery turnarounds in May, the heaviest since November 2017. The work includes the 0.49 mb/d Abadan refinery, which produces around 0.12 mb/d of fuel oil. With wider regional demand picking up and supplies from key producers falling, Middle Eastern resupplies to Singapore, which at times hit lofty levels of close to 2 Mt a month in Q4 17 and early 2018, are set to fall this summer.
Even India, traditionally a net exporter of fuel oil, is set to be net short over the balance of Q2 18, as coker expansions cut into supplies amid recovering demand. The delayed 50 thousand b/d expansion of the coker at Reliance’s Jamnagar export refinery, which is now planned for June, may see the refiner dip into the spot market for supplies.
Near-term balances could also tighten on run cuts at simple refineries spurred by deteriorating margins on the back of the rapid tightening in crude markets. The last episode of run cuts in mid-2016 led to a further boost to fuel oil demand as refineries reverted to ‘dumb-bell‘ processing strategies involving blends of light crude and heavy feedstock such as straight-run fuel oil.
So, the summer months can still surprise to the upside, but beyond August our balances loosen versus year-ago levels, leaving only a narrow window of opportunity for structural tightness before the market’s attention shifts decisively to dealing with up to 3 mb/d of HSFO supply that will no longer be required, come 1 January 2020. Time is running out for fuel oil to perform, but IMO 2020 has not had the last laugh just yet.