Refining losses from producing fuel oil in Asia may widen 30 percent to the most in two years in the next month as an increase in crude processing leads to a glut.
The loss from turning crude into the fuel, the so-called crack spread, may rise to $13 a barrel by the end of January from about $10 this month, a Bloomberg News survey of four traders showed. The last time it was at that level was in November 2008, when crude traded below $60 a barrel, compared with almost $90 today, according to data compiled by Bloomberg.
The supply of fuel oil, a residue from crude refining that is used mainly to power ships and industrial plants, is increasing as Asian refiners raise processing rates to boost returns from gasoil, or diesel. Companies typically accept a loss from selling residues because they can offset it against the profit from more valuable products.
“I don’t see any factors that could narrow the crack spread now,” said Yasuhito Imaizumi, a Singapore-based manager at Petro Summit Pte, a unit of Sumitomo Corp., the third-largest trading company in Japan. “The crack would remain weak for a while.”
The fuel-oil crack, as measured by the discount of the benchmark 180-centistoke grade in Singapore relative to Dubai crude, has widened as much as 60 percent this month to $10.93 a barrel on Dec. 15, the most since March 2009. It has averaged $4.71 in the past two years.
Higher Refinery Runs
At the same time, the spread on gasoil to Dubai crude has climbed about 45 percent to as much as $15.07 a barrel on Dec. 6, the highest level this year, Bloomberg data show. It has averaged $9.26 in the past two years. The return may be about $13 to $14 through January and February, according to FACTS Global Energy, a Singapore-based energy researcher.
“On the supply side, we are seeing higher refinery runs,” said Alex Yap, an analyst at FACTS. “On the demand side, there is the usual winter demand for gasoil and kerosene. It seems balanced.”
Asian refiners are increasing crude processing to record levels as consumption of oil products reaches a seasonal peak following maintenance shutdowns, according to JPMorgan Chase & Co. China’s refining rate rose to a record 8.96 million barrels a day in November, the bank said.
“We project that Asian crude runs will increase by a further 500,000 barrels a day in January before pulling back slightly in February,” JPMorgan analysts led by New York-based Lawrence Eagles said in a Dec. 16 report.
The refinery utilization rate in Japan, Asia’s second-biggest oil consumer, rose 1.3 percentage points to 86.9 percent in the week ended Dec. 11, the Petroleum Association of Japan said Dec. 15. That’s the highest in at least 10 months.
Oil futures in New York gained 13 percent this year, reaching a 26-month high of $90.76 a barrel on Dec. 7, as signs that the global economic recovery is gaining pace boosted the outlook for fuel use. Goldman Sachs Group Inc. forecast on Dec. 13 that oil will climb to $105 within a year. Futures for February delivery rose for a fourth day today to trade above $90.
Rising prices typically encourage increased output in the Middle East, where fuel oil yields are larger because of the region’s heavier grades of crude. The fuel-oil crack widened to $30.46 a barrel when crude settled at a record high of $145.29 in July 2008.
“When people have their sights on crude oil set at $100, that is the time availability of fuel oil starts rising,” said Akira Kamiyama, a trader at Mitsui & Co. in Tokyo.
Demand for marine fuel, or bunker, from ship owners often falls when prices trade near $500 a ton, according to Petro Summit’s Imaizumi. The price of 380-centistoke bunker fuel has averaged $501.01 since Dec. 3 in Singapore, the world’s largest bunkering port, according to Bloomberg data.
“Purchases by ship owners have started slowing and that is sending Singapore fuel-oil inventories higher,” Imaizumi said.
Fuel-oil inventories in Singapore, Asia’s oil-trading and storage hub, climbed 19 percent to 22.5 million barrels in the week ended Dec. 15, according to the trade ministry. Stockpiles were at a 42-week low of 19 million in the week to Nov. 17.
Fuel oil arrivals to Singapore from Europe, the Middle East, the Caribbean and the U.S. Gulf will probably fall to 3.5 million tons in January from about 4 million scheduled in December, according to the traders. January shipments may include three so-called Aframax tankers, or about 240,000 tons, of Iranian fuel oil, said a Singapore-based trader, who asked not to be identified because of company policy.
Koch Industries Inc. hired the Alexander the Great to load 270,000 tons on Jan. 1 for delivery to Singapore in the first reported Europe-to-Asia supertanker fixture for 2011, according to Clarkson Plc, the world’s biggest shipbroker. The Liberia-flagged Very Large Crude Carrier, or VLCC, may be booked for $3.45 million, Clarkson said.