Cargoes of the ship and power-station fuel cost an average $10.20 a barrel below Dubai crude this month, the largest monthly discount since April 2011, according to data compiled by Bloomberg. That gap, known as the crack spread, will narrow to minus $8 a barrel in the first quarter of 2014, according to the median estimate in a survey of five analysts and traders.
A recovery in fuel oil, which refiners typically produce at a loss after making gasoline and diesel, will help boost margins at companies including South Korea’s S-Oil Corp. (010950) and Royal Dutch Shell Plc. (RDSA) Iran, once the second-biggest supplier to China, has cut exports by 67 percent compared with earlier this year. At the same time, global demand for shipping fuel is forecast to rebound amid economic growth from the U.S. to China.
“We will see more recovery in 2014,” said Ehsan Ul-Haq, a senior market consultant at KBC Energy in Walton-on-Thames, England, who forecasts a crack of minus $7.50 in the first quarter. “Demand will recover if the Chinese and western economy recovers. Iran is going to use fuel oil domestically because they always have a gas shortage in winter.”
Front-month high-sulfur fuel oil swaps were at $623.05 a metric ton as of 3:39 p.m. New York time, up 0.4 percent this year. Dubai crude, the benchmark grade for Asia, was at $108.63 a barrel today, gaining 2.2 percent in 2013.
Estimates for the first quarter crack ranged from minus $7.50 to $8.83 a barrel in the Bloomberg News survey that was conducted through Dec. 17. It averaged $9.74 this quarter.
Iran has cut exports to about 200,000 tons a month since October from 600,000 tons earlier this year, an official at National Iranian Oil Co. said Dec. 12, asking not to be identified because of company rules. Volumes are unlikely to increase before February, he said.
China’s fuel oil imports from Iran fell to 30,000 tons in November, from as much as 526,203 tons in May, the most in almost nine years, according to customs data. The Persian Gulf country was China’s biggest source of fuel oil in May after Russia, accounting for about 19 percent of overseas supplies. The nation’s total fuel oil purchases fell to 1.47 million tons last month from 2.83 million in May.
Demand from the world’s second-biggest oil consumer may wane next year as government reforms allow smaller refineries, known as teapots, to import more crude as an alternative to fuel oil, according to Angie Huang, an analyst at ICIS-C1 Energy, a Shanghai-based researcher.
China National Chemical Corp., known as ChemChina, started importing crude earlier this year to supply its plant in the eastern province of Shandong. Teapot refineries, which account for about one-third of the nation’s total fuel oil imports, typically process the fuel into gasoline and diesel while bigger plants use crude.
A seasonal increase in Asian demand for power generation and declining imports from Europe amid refinery maintenance will be enough to drive a recovery in fuel oil cracks in the first quarter of next year, according to Harry Tchilinguirian, a London-based analyst at BNP Paribas SA, which recommended buying the Singapore high-sulfur crack in a Dec. 10 report.
Shipments scheduled to arrive in Asia from Europe, the U.S., and the Caribbean are at 3.26 million tons for January arrival compared with as much as 4.13 million in August, according to shipping data compiled by Bloomberg News. Supplies averaged 3.53 million tons a month from January to November.
“European refinery runs remain low post-maintenance, tightening supply of fuel oil”, Tchilinguirian said in the note. “Asian demand is set to pick up seasonally, while imports will recede from summer highs.”
Russia’s offline crude oil-refining capacity totaled 75,900 tons a day as of Dec. 11, up 6.8 percent from the previous week, according to Energy Ministry data. Workers at Total SA (FP)’s refineries in France went on strike earlier this month over pay, disrupting production. The five plants can process about 60 percent of the nation’s output, data compiled by Bloomberg show.
Earnings at Shell, whose 500,000 barrel-a-day refinery in Singapore is its biggest globally, missed analyst estimates in the third quarter. Income from refining and marketing shrank by almost 50 percent to $892 million from a year earlier as the company faced “headwinds from weak industry refining margins,” Chief Executive Officer Peter Voser said in a statement Oct. 31. A Singapore-based spokeswoman for Shell said the company declined to comment when asked about the fuel oil market.
S-Oil, South Korea’s third-biggest refiner, said on Oct. 24 that its net income slid 56 percent to 203.1 billion won ($190 million) in the third quarter. A Seoul-based spokesman at S-Oil declined to comment by phone. Shell’s shares are up 1.9 percent this year in London while S-Oil is down 28 percent in Seoul.
Demand for shipping fuel, know as bunker, may also recover amid “an anticipated acceleration in global economic growth, centered in Asia”, according to BNP’s Tchilinguirian.
China’s trade surplus widened to $33.8 billion in November, the most in more than four years, according to Dec. 9 data from Chinese customs. Economic growth this year is likely to beat the government’s target, Xinhua News Agency reported, citing the State Council.
U.S. gross domestic product grew at 4.1 percent annualized rate in the third quarter, the fastest pace in almost two years, the Commerce Department said Dec. 20. The International Monetary Fund is raising its outlook for the country’s economy, IMF Managing Director Christine Lagarde said Dec. 22.
That growth is adding to speculation demand for shipping, and the oil to power ships, will increase. Fuel sales in Singapore, the world’s top bunkering port, rose to 3.8 million tons in October, the highest in nine months and up 7.8 percent from a year earlier, according to Maritime and Port Authority data. They were at 3.4 million in November.
An easing of international sanctions against Iran is unlikely to bring more fuel oil from the country into Asia, according to JBC Energy GmbH, a Vienna-based energy consultant.
The U.S. and its allies agreed last month to scale back measures targeting Iran’s exports in return for it curbing its nuclear program. The EU lifted a ban on insurance for tankers that carry Iranian crude and the U.S. said it will refrain from forcing buyers to cut purchases further. Restrictions on importing the nation’s oil remain in place.
“We expect Singapore fuel oil cracks to rise in the coming weeks,” JBC said in e-mailed comments on Dec. 12, predicting a first quarter average of minus $8.83. “The latest downward pressure came partially from expectations that Iranian fuel oil exports were going to resume at regular levels, however we doubt this is going to happen in the short term.”
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