Global fuel oil markets have quietly tightened in recent months with supply falling in Europe and the Middle East just as demand from the shipping industry is picking up. On specification material is hard to come by in some places, which is spurring a short-term rebound in Asian fuel oil cracks. But the bullish window will close as longer term demand trends reassert themselves in the spring.
After growing steadily tighter through most of 2013 as world supply fell faster than demand, global fuel oil balances are set to weaken. Supply restraint is easing in Europe while output is expected to grow modestly in both Asia and the FSU. Despite support from the shipping sector, which appears to be showing renewed demand for fuel amid a rebound in global trade, demand is slowing in Asia as regional supply grows.
Looming changes in the global fuel oil market in 2015 will have an influence on this year's market. Export duties on fuel oil will rise in Russia in 2015, equalising the rates between dirty products and crude oil, which will undercut refining margins for unsophisticated plants. As such, even though there is speculation the tax overhaul will be postponed, Russian refiners can be expected to maximise runs in 2014 in an effort to get the most profit out of aging assets.
The International Convention for the Prevention of Pollution from Ships (Marpol) will also greatly tighten the rules on ship fuel in 2015 by enforcing a much lower sulphur limit in designated coastal areas in Europe and North America which is likely to force a switch to distillate fuels. European fuel oil markets could see demand for low sulphur fuel oil fall by up to 0.18 mb/d in 2015 as a result, which will encourage destocking towards the end of 2014 and back out Brazilian LSFO imports to Europe.
Chinese fuel oil demand will fall in 2014 as teapot refiners increasingly switch to crude oil as Beijing slowly liberalises crude oil imports. Tightening product specifications in China and weak domestic demand for diesel fuel will further weigh on teapot demand for feedstock. Japan will also see demand lower y/y on base effects as 2014 will reflect a full year of higher coal-fired electricity production. US refiners will likely increase fuel oil purchases to fill up secondary conversion capacity, however, as Gulf Coast plants switch to lighter domestic crude oil slates.
Latin American balances will be stable despite plunging Mexican demand as refinery problems in Venezuela restrain supply. Mexico's weak economy and access to cheap US natural gas are denting fuel oil demand but consumption may recover if Mexico benefits from the recent strength in the US economy. Throughputs at Venezuela's refineries will likely be around 0.9 mb/d in 2014 and fuel oil quality is erratic. Lower hydrogen output at the 0.65 mbd Amuay refinery means more heavy gasoil is being blended into fuel oil rather than fed to conversion units.
Middle Eastern fuel oil balances are expected to tighten. Surging Iranian domestic fuel oil consumption is cutting exports, a key factor behind the recent strength in the Asian viscosity spread. Regional fuel oil output has also slowed as Saudi Arabian refinery runs were surprisingly low in late despite the 0.4 mb/d SATORP refinery in Jubail starting up.