Global fuel oil markets have continued to struggle with poor demand despite the slide in flat prices. Cracks have held up relatively well, but end-user demand in Asia has so far not responded to cheaper prices. Japanese utilities have needed less fuel oil with low power demand while Chinese teapot refiners are still under margin pressure. Bunker sales in Singapore have so far been soft as well. With western arbitrage flows into Asia in November nearing 5 Mt, the bears have something concrete to focus upon-but the supply picture becomes more supportive once these barrels are digested.
We expect western inflows into Asia in December to be limited due to bad weather in the Black Sea and refinery turnarounds cutting exports from Europe and Russia in October. However with Singapore onshore fuel oil stocks still some 3.6 mb higher than they were in August, there is room for the Asian market to absorb a decline in supply, so long as it is temporary.
European fuel oil stocks are tight and Russian domestic demand has been cutting into export availabilities. East of Suez, Iranian exports have again been reduced, either to stockpile supplies for winter or due to refinery maintenance. Saudi fuel oil demand has been strong, leaving little for export, so three of the major fuel oil exporters are consuming more of their own product these days. Mexican demand declines slowed markedly in September as well, as y/y comparisons became more difficult. However the imminent start of new natural gas pipeline capacity will weigh on fuel oil demand once again.
The start of the 0.4 mb/d Yasref refinery should temporarily boost Saudi fuel oil output which will weigh on balances, particularly as the straight run fuel oil produced by Yasref during start-up will be a good blendstock for high density material brought in to Asia from western markets. Yasref is now seen starting exports of refined products in December, a few weeks later than expected, after encountering minor problems during start-up.
But demand in the Mediterranean has boosted delivered prices there in recent days, increasing the competition with Asia for supply. US East Coast fuel oil consumption during the winter may be strong again due to constraints on natural gas pipelines in New England. Natural gas swaps for January 2015 delivery are pricing gas at a premium to fuel oil in terms of heat value, implying significant fuel switching by the power generation sector.
Drought conditions in Latin America are driving down hydroelectric reservoirs sharply. Some hydro power plants in Brazil are expected to see record low reservoir levels in November due to low rainfall. Venezuela is also reportedly at risk of a serious power shortage due to low rainfall. However weakening regional economies mean electricity demand may be less strong than anticipated, which could reduce the call on fuel oil to meet demand requirements.
Ultimately we see fuel oil as a challenged product, but the market environment for the next month or so may prove supportive. Much of the bad news on demand in Asia seems already priced in, leaving some upside due to the supply tightness we anticipate in the coming weeks.