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Fuel-Oil Refining Loss to Grow on Asian Glut: Energy Markets

Fuel-oil shipments to Singapore are poised to climb in September by the most in six months, widening the losses incurred by Asian refiners from producing the commodity, according to a Bloomberg survey.

Imports will jump about 25 percent this month to 4 million metric tons compared with August, based on the median estimate of five traders in Singapore and Tokyo surveyed by Bloomberg.

Production of fuel oil, a residue of crude used to power ships and generate electricity, is rising as companies boost capacity to make higher-value products in anticipation of growing demand. Refiners typically incur a loss on fuel oil, expressed as the so-called crack spread, that is offset by the profit from gasoline and diesel.

It’s “weighing on the fuel-oil market,” said Yasuhito Imaizumi, a Singapore-based manager at Petro Summit Pte, a unit of Sumitomo Corp., Japan’s third-largest trading company. “There is a possibility that fuel oil’s crack spread may reach $10 a barrel in September.”

The crack spread between 180-centistoke high-sulfur fuel oil in Singapore and Dubai crude, the region’s benchmark blend, widened to minus $6.54 a barrel on Sept. 13, the most in two months, and was at minus $6.29 yesterday. It averaged minus $3.82 in August and minus $4.14 a barrel in the past year, according to data compiled by Bloomberg. Singapore is Asia’s oil-trading hub.

Russian Supply

Cargoes of Russian fuel oil diverted to Singapore from the U.S., where refinery utilization rates are falling, may exacerbate the glut this month, according to the traders. About a quarter of Russia’s exports are so-called straight-run fuel oil, a direct residue from crude distillation that’s also used as a feedstock for vacuum-distillation units to make gasoil components, according to Akira Kamiyama at Mitsui & Co.

“Roughly 1 million tons of Russian cargoes go into the U.S. every month,” said Kamiyama, a trader based in Tokyo. “These are probably headed to Singapore this month as U.S. refiners cut their run rates.”

Operating rates in the U.S., the world’s largest oil-consuming nation, fell to 87 percent of capacity at the end of August, the lowest level in four months, according to the Energy Department. They reached a 34-month high of 91.5 percent in July as motorists increased fuel purchases for summer vacations. U.S. refiners typically shut facilities for maintenance after the driving season, when demand for winter fuels has yet to rise. The rate was 87.6 percent for the week ended Sept. 10.

Price Differentials

Shipments to Asia are also flowing from Europe as price differentials lure traders. Benchmark prices in the Amsterdam- Rotterdam-Antwerp barge market held at an average $25.36 a ton below Singapore second-month swap prices in August, more than covering the $10.40 to $11.10 a ton it costs to transport fuel oil from Europe to Asia, based on tanker fixtures from Clarkson.

Fuel-oil inventories at Rotterdam climbed 8 percent to 856,000 tons in the week through yesterday, the highest level since July 22, according to PJK International BV, an Oosterhout, Netherlands-based petroleum-industry researcher. Onshore stockpiles of residual fuels in Singapore jumped 15 percent to 23.28 million barrels, or 3.6 million tons, the highest since May, government data showed.

At least three Very Large Crude Carriers were hired to load fuel oil this month from Rotterdam, part of Europe’s independent storage hub with Amsterdam and Antwerp, for delivery to Singapore, according to shipbrokers such as Clarkson Plc.

Litasco, the trading unit of OAO Lukoil, Russia’s biggest non-state producer, loaded 270,000 tons on the Genmar Vision on Sept. 14 for $2.8 million, Clarkson said. Vitol Group chartered the Front Kathrine to load on Sept. 16 for $2.9 million and BP Plc hired the Maran Castor to load on Sept. 26 for $3 million.

Bunker Demand

Demand for ship fuel, or bunker, in Singapore slowed in August after climbing to an all-time high in July, according to Imaizumi at Petro Summit.

“The only steady demand I see is 500-centistoke bunker fuel,” he said. “Demand for the high-viscosity grade used by large container vessels is pretty strong now. That probably reflects stronger commodity distribution on the back of an improving economy in this part of Asia.”

Centistoke levels measure viscosity when fuel oil is heated. Higher centistoke grades have a slower flow rate and require blending with lighter fuels for use in ship engines and power stations.

Singapore handled 2.53 million 20-foot equivalent units of container traffic in July, the most since October 2008, according to Maritime and Port Authority of Singapore data.

About 500,000 tons of 500-centistoke fuel oil is traded every month in Singapore, where more than 3 million tons of the commodity changes hands every year.

Bunker-fuel sales in Singapore decreased 5.3 percent in August from the previous month to 3.38 million tons, the lowest since March, preliminary data from the port authority showed. Sales were 10.2 percent higher than a year earlier.

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