SINGAPORE: Fuel oil profit margins have surged to their highest in more than five years on lower supplies and rising demand from electric power generators, which may push some refiners to increase their runs.
Fuel oil, the residue left over after initial crude refining, has become scarce in Asia as refiners make their plants more complex by upgrading their plants to change the fuel into gasoline and diesel. However, analysts caution that new supply should begin flowing to the region from Europe and South America, eventually driving margins back towards their typical levels.
The spread between the 180-centistoke fuel oil swap and Dubai crude for July was at a premium of 27 cents a barrel on Wednesday, the first time the residual fuel has been at a premium to Dubai since January 2012. The margin has averaged a discount of $3.09 in 2017 and averaged minus $5.37 last year.
The higher margins are bolstering the values for regional crude oil grades that yield a large volume of fuel oil when refined, particularly at less complex plants, said three traders in that market.
"The elevated fuel oil cracks could prompt some simple refiners to increase run rates over the near term but the extent of this could be limited in light of relatively lower gains in light and middle distillate cracks," said Sri Paravaikkarasu, the Head of East of Suez Oil at energy consultancy FGE.
While fuel oil margins will remain elevated, they should ease in the coming months.
FGE's Paravaikkarasu pointed to rising exports from Latin America and the former Soviet Union in the fourth quarter as refiners there increase run rates and utilities switch away from burning fuel oil to natural gas.
Fuel oil is primarily used to power large ships and for electric power generation. Utilities' consumption of the fuel tends to peak in the summer to meet increased cooling demand.
"We could potentially see some correction in fuel oil crack values once peak summer demand eases," said Nevyn Nah, oil products analyst at Energy Aspects.
Fuel oil supplies this year have declined after the members of the Organization of the Petroleum Exporting Countries focused their crude cuts on grades that yield the most fuel oil. Investments into refinery upgrades in places like India and Russia also cut supply.
Over the first week of June, onshore fuel oil stocks in Singapore, the world's biggest fuel oil trading hub, sank to their lowest in more than 2-1/2 years while inventories in northwest Europe fell their lowest since October.
Refinery outages in Venezuela, a key fuel oil producer have also helped constrain supplies.
Demand for the fuel has also been supportive. Fuel oil sales to power ships in Singapore, the world's biggest ship fuel port, rose to an all-time high in January, while sales from February to March set monthly records.
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