<article><p class="lead">Strong demand for fuel oil with a maximum sulphur content of 0.5pc will support refining margins for the product in Europe in the first half of 2020, but sustained Russian levels of production of high-sulphur fuel oil (HSFO) are likely to pressure margins as the International Maritime Organisation's (IMO) 2020 sulphur cap comes into force.</p><p>IMO 2020-compliant fuel oil became the primary marine fuel option for shipowners as early as November, with sales in Europe's largest bunkering port of Rotterdam reaching 51pc of the total marine pool. Growing storage of 0.5pc fuel oil as well as rising sales of the product suggest it will remain the primary marine fuel in 2020, as demand for 0.1pc sulphur marine gasoil (MGO) stays muted. Delayed exhaust gas scrubber installations, which allow ships to continue burning HSFO, will further boost demand for IMO-compliant products.</p><p>New marine fuel regulations will have a major impact on fuel oil trade routes. European IMO-compliant fuel oil may stay in the continent, as European production is likely to be needed to meet demand in regions that have no plans to produce IMO-compliant fuels. Europe previously exported most of its surplus fuel oil to Asia-Pacific and Russian fuel oil also flowed from Rotterdam east of Suez. Trading and refining company Gunvor scrapped plans to produce HSFO at its plants in Rotterdam and Antwerp, opting to produce 0.5pc fuel oil in the second quarter of 2020. Market participants had expected Gunvor to be the main supplier of HSFO in northwest Europe, and lack of domestic supply will increase dependence on Russian HSFO. Additional 0.5pc fuel oil production by Gunvor plants could result in oversupply for northwest Europe, driving exports.</p><p>Scandinavian refiners will continue adding to 0.5pc fuel oil supply in northwest Europe, as producers such as Equinor have started shipping most of their fuel to the region, while BP, Shell, ExxonMobil and Total are among major refineries producing 0.5pc fuel oil in the Amsterdam-Rotterdam-Antwerp hub.</p><p>Incentivising margins for 0.5pc fuel oil may also boost production of the product, as it has been as profitable as road fuels. European 0.5pc fuel oil margins against Ice Brent crude have averaged a premium of $11/bl since October on a fob basis, compared with benchmark Eurobob gasoline margins at $7.60/bl and French diesel cracks at $17.50/bl.</p><p>Traditional European fuel oil exports to Asia-Pacific will probably slow further in the first half of 2020, as the world's largest bunkering hub in Singapore will need less HSFO. Saudi Arabia will become the largest importer of HSFO from Europe and Russia, as the country tries to reduce direct crude burn for power generation. Complex US refineries started buying HSFO from Europe and Russia in the fourth quarter of 2019 amid weakening bunker demand. This trend could continue if HSFO margins remain under pressure, as US refiners look to cheaper dirty products to replace heavy crude flows that have fallen away from traditional suppliers, such as Venezuela and Iran.</p><p>Russia will probably remain the largest HSFO supplier for Europe, on the back of sustained output. Russia's largest refiner Rosneft offered up to 21.8mn t of HSFO in its 2020 term tender, up from 19.9mn t in 2019. Rosneft's delayed refinery upgrades will probably keep its fuel oil output at a high level until at least 2023, when most of its upgrades are scheduled for completion. Russian fuel oil output in January-October 2019 reached 39mn t, up by less than 1pc from a year earlier.</p><p><i>By Enes Tunagur</i></p></article>
