Singapore 180-cst fuel oil margin hits high on tight supply, drop in crude prices

SINGAPORE: The front-month Singapore 180-centistoke (cst) high-sulphur fuel oil refining margin hit a record high on Tuesday for the second time this month, boosted by tightening global supply and falling crude oil prices.

Lower fuel oil output from refiners in the United Arab Emirates (UAE) and northwest Europe, limited Iranian fuel oil exports due to US sanctions on the nation and steep declines in crude prices have bolstered fuel oil markets, said Matthew Chew, principal oil analyst at IHS Markit in Singapore.

While refinery upgrades and disruptions have crimped global fuel oil supply this year, firm demand could keep margins high in the near-term.

"We expect the strong fuel oil market to remain going into winter as heating demand increases," said Chew.

The front-month Singapore 180-cst fuel oil swap was at a record premium of $4.16 a barrel above Middle East benchmark Dubai crude oil on Tuesday.

Similarly, the 180-cst margin to global benchmark Brent crude reached a record premium of $2.59 a barrel, Refinitiv Eikon data showed.

It is rare for fuel oil to trade at a premium to crude oil as it is a byproduct of the crude refining process.

But Asia's gasoline margin to Brent crude was at just $1.16 a barrel, dragged down by heavy global supplies.

Front-month fuel oil cracks to Dubai and Brent crudes were last at record highs of $3.20 a barrel and $1.56 a barrel respectively on Nov. 7, Refinitiv data showed.

However, as the profits from producing fuel oil remain at elevated levels, refiners may soon begin to boost supply by increasing output of residual fuels.

"As far as December goes, the refining margin for a hydroskimming refinery appears to be almost as good as that of a cracking refinery," said Sukrit Vijayakar, director of Indian energy consultancy Trifecta.

This gives an incentive for simpler hydroskimming refineries, which typically produce more fuel oil in comparison to more complex cracking refineries, to maximise their processing capacity, said Vijayakar.

"So, I would be hopeful of seeing more supplies of fuel oil in December."

The record fuel oil margins come ahead of new global standards that will by the start of 2020 limit the sulphur content of marine fuels to 0.5 percent, from 3.5 percent currently, lowering global demand for high-sulphur fuel oil and forcing refiners and shippers to make large investments to comply with the new rules.