SINGAPORE: Tight supplies have pushed Asia’s refining margins for very low sulphur fuel oil (VLSFO) to two-year highs, but they may ease over the coming weeks as peak winter demand recedes and refineries increase output, analysts and industry sources said.
Demand for the fuel rose this winter as North Asian utilities sought to mitigate soaring natural gas costs, analysts said, while the recovery in demand for industrial and transport fuels, strong middle distillate and gasoline refining margins have tightened the supply of VLSFO and its blending components.
“The strong gasoline and diesel markets compete with feedstock for lower sulphur fuel oil, further supporting the (VLSFO) market,” said Kendrick Wee, director at IHS Markit in Singapore, adding that Asia’s imports from the West are expected to be limited over the near term.
Disruptions in the supply of low-sulphur crude oil, used in VLSFO production, have contributed to the supply crunch.
“Libya and Nigeria crude supply disruption led (the) market to anticipate lower sweet crude supply which is key feedstock for VLSFO production,” said Wei Cheong, vice president of analysis at Rystad Energy.
These factors combined pushed the front-month VLSFO refining margin to a two-year high of $19.13 a barrel above Dubai crude on Friday, Refinitiv data showed.
Asian front-month gasoil and jet fuel margins on Monday hit $19.11 a barrel and $16.46 a barrel, respectively, their highest levels since late 2019.
However, complex refining margins in Asia are at their highest in more than three months, encouraging refiners to increase output, which may ease refined fuel supply tightness.
Global fuel oil supplies could increase by 660,000 barrels per day year-on-year in the first quarter of 2022 on higher refinery runs and deferred maintenance from March-April to later in the year, consultancy Energy Aspects said in its latest outlook report on Jan. 31.
“While Asian VLSFO cracks could rebound further on ongoing tight supply, easing LSFO utility demand from Northeast Asia by the end of February, should provide some relief to the marine fuel complex,” Energy Aspects said.
More supplies could also come from Kuwait’s 615,000 barrel-per-day Al Zour refinery project, which is expected to begin its VLSFO exports this year.
“New LSFO supplies could potentially come online in the second-half of 2022 with the start up of Al-Zour and to ease the supply tightness,” IHS Markit’s Wee said.
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