SINGAPORE (Reuters) - Asian refining margins for fuel oil are set to hold near their current strong levels through the summer as increased use of the fuel by utilities to power air conditioners for cooling and disruptions to trade flows shrink global supplies.
“Robust power generation demand in the Middle East (notably Saudi Arabia) should result in lower fuel oil outflows from the region,” said Iman Nasseri, managing director of energy consultancy FGE’s Middle East office.
While fuel oil markets typically strengthen during the northern hemisphere summer months, four trade sources said fuel oil margins have demonstrated additional strength this year by shrugging off sharp gains in crude oil prices LCOc1, which in mid-May climbed to their highest since November 2014.
The trade sources declined to be identified as they are unauthorised to speak to the media.
“Fears over falling Iranian supply ... structural falls in global supply, and a strong seasonal demand uptick in the Middle East for power generation are combining to provide support,” Vienna-based consultancy JBC Energy said in a research note last week.
Lower fuel oil output in Venezuela due to refinery outages and a lack of crude oil, and refinery upgrades in Russia, the Middle East, India and South Korea have all contributed to tightening global supplies of the fuel, used to generate electricity and power industrial boilers and ships.
With the fuel oil surplus in the Middle East shrinking this year and next due to increased oil-fired power plant expansions, the region is projected to become a net fuel oil importer by mid-2019, though only for a short period of time, Nasseri said.
Increasing Saudi Arabian power demand amid falling supply from there, the United Arab Emirates and Kuwait underpin the big shift, he said.
The 180-centistoke high-sulphur fuel oil discount to Dubai crude FO180SGCKMc1 on Monday settled at $3.21 a barrel, with Dubai crude DUB-1M-A holding above $74 a barrel.
In November 2014, when Dubai crude was last at similar levels, the same fuel oil crack or margin was at a discount wider than $6 a barrel.
Reflecting fuel oil’s strength, the Singapore crack was the only one to post gains over the past few weeks, with ample supplies and rising crude prices weighing on other refined fuels, including gasoline and diesel.
“Fuel oil cracks should weaken as we move through (second-half 2018) as seasonal demand support wanes and destocking pressures from a highly backwardated market ... compensate for growing tightness in the fundamental balance,” JBC said.
While strength in fuel oil markets subsides with the passing of peak utility demand, though, some analysts and traders see limited downside for fuel oil in the second half of the year.
In addition to tightening supplies, looming U.S. sanctions on oil exports from Iran - a major fuel oil producer with exports of about 17 million tonnes in 2017 - could further limit fuel oil outflows, mainly to Asia.
Also, expectations of higher crude supplies in the second half of the year amid rising output from producers outside the Organisation of the Petroleum Exporting Countries, including the United States and Russia, could weigh on crude prices, potentially lending support to fuel oil cracks.
Reporting by Roslan Khasawneh; Editing by Tom Hogue