Fires Spark a Double Bonanza for Oil Refinersby
Plant fires tighten supply, boost global oil refining margins
More disruptions can lead to unusual arbitrage trades: FGE
Oil refiners from Japan to the U.S. are benefiting from being forced by fires to make less fuel.
A slew of blazes at plants across the globe is shrinking supplies and boosting profits from turning crude into products such as gasoline and diesel. At least 13 refineries, including in Ruwais in Abu Dhabi, Deer Park in Texas and Tuapse in Russia with a combined capacity of about 1.8 million barrels a day, were struck by fire this month, according to data compiled by Bloomberg. That’s more than double the five plants affected last month.
The unexpected incidents are offering refiners a double windfall as it coincides with declining global fuel inventories amid solid demand. Total oil-product stockpiles in developed countries fell in November for a fourth month, with a “hefty” drop in middle distillates such as diesel in Europe, according to the International Energy Agency. If such outages continue, unusual intercontinental flows of fuels may occur this year, according to industry consultant FGE.
“These fires were certainly not expected, and when they happen, they help cracks,” said FGE analyst Sri Paravaikkarasu from Singapore. The incidents “definitely boosted overall market sentiment. Demand growth is still strong. Any small outage is helping to boost margins,” she said.
Processing profits in Singapore, a regional benchmark, averaged $7.25 per barrel in January, up from $6.70 a barrel in December, Paravaikkarasu estimates. If it had not been for fires, margins would have been 60 cents to $1 a barrel lower this month, she said. Average returns in Europe jumped to $2.68 a barrel from 78 cents a barrel, with U.S. rates 3.7 percent higher to $11.28, according to Bloomberg data.
An event like a blaze -- an unexpected disruption to supply -- is affecting margins to a greater extent this time around than two years earlier as global stockpiles have shrunk and the pace of additions to refining capacity has slowed, according to Paravaikkarasu.
Diesel inventories in China, the world’s biggest energy user, slipped to 5.81 million metric tons in December, the least on record, according to data from Xinhua’s China Oil, Gas and Petrochemicals newsletter. Fuel oil stockpiles in Singapore, a regional hub of oil trading, dropped to a two-year low earlier this month, official data show.
Global fuel demand will rise by 1.4 million barrels per day in the first quarter from a year earlier, exceeding a “modest ” gain of 310,000 barrels per day in refinery processing rates, the IEA estimates.
The fires can prompt fuel to travel to more unusual, distant customers, offering a money-making opportunity for traders seeking to take advantage of price differentials between the East and the West.
“If there are refinery glitches in the East, refiners in the West have to make up for the loss in Asia, which results in higher profits in Europe,” said Ehsan Ul-Haq, principal consultant at KBC Advanced Technologies.
Abu Dhabi National Oil Co. has sold a cargo of straight-run residual fuel oil to Cargill Inc. after a blaze at its Ruwais refinery earlier this month forced the company to export excess fuel that was to be processed at halted units. The shipment is going to a Chinese independent refiner, according to traders with knowledge of the matter.
“Internationally such reshuffling is much easier as fuel specifications are simpler and there are many grades consumed in various places,” John Vautrain, head of consultant Vautrain & Co., said of intercontinental flows known as arbitrage trades.
Margins may weaken in the second and third quarters before recovering in the final period to levels seen in the first quarter, according to KBC.
FGE’s Paravaikkarasu sees Singapore margins in the range of $6 to $7 a barrel at least until the third quarter. “We’re a little bit higher currently because of the fires,” she said.