London, 4 June (Argus) — Fuel oil demand will continue to fall this year, as cheaper alternative fuels replace it in the power generation sector. But demand losses may be slowing in the short term, because of strong demand in China and the Mideast Gulf and wider coking margins in the US.
Global demand will fall by 100,000 b/d this year to around 9mn b/d, Total oil analyst Caroline Ashton projects. This is slower than the average annual demand decline of around 225,000 b/d in 2005-09. Some sections of the residual fuel market are being hit harder than others. The recession cut bunker fuel demand by up to a fifth, or 700,000 b/d, a senior fuel oil trader at US firm Hess, Marek Grey, says.
The global refining industry is adjusting to declining fuel oil demand by becoming more complex or shutting down simpler plants. Russia, which exports just over 1mn b/d of fuel oil, will produce 30pc less by 2020, Moscow-based Petromarket Research general director Yakov Ruderman says. Much of this is because Russian refineries are adding more upgrading capacity. Russian straight-run fuel oil output will witness a “dramatic” decline to 85,000 b/d in 2020 from 500,000 b/d now, Ruderman says.
But the market has shown some signs of strength, despite longer-term decline. Fuel oil margins were relatively firm last year, despite the recession, as Opec cut heavy crude output and simple refiners reduced runs. Chinese bunker fuel demand rose by 70,000 b/d to 160,000 b/d in 2009, UK-based Petro Summit's senior fuel oil trader Hasashi Miyagawa says. And Chinese fuel oil imports surged to 210,000 b/d in December, after firms took advantage of a dip in outright prices.
The fuel oil market could firm in the short term because of improving US coker economics, which would reduce residual fuel supply.
Refinery shutdowns in Europe are boosting low-sulphur fuel oil markets. Intermittent operations at ConocoPhillips' 260,000 b/d Wilhelmshaven refinery in Germany have cut low-sulphur fuel oil supply since October. And Total's 222,000 b/d Lindsey refinery in the UK, which produces 15,000-20,000 b/d of low-sulphur fuel oil, is shut for maintenance until the end of July.
Tighter bunker fuel pollution regulations will boost low-sulphur fuel oil markets. The International Maritime Organisation and the EU will mandate a switch to 1pc sulphur bunker fuel from the current 1.5pc grade used by ships sailing in the world's emissions control areas in July this year.
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