US residual fuel oil inventories sank to a 10-week low last week as falling production and high blending costs outweigh steadily rising imports.
Fuel oil stockpiles in the week ended 27 May fell to 26.9mn bl, the lowest since 18 March, according to the US Energy Information Administration (EIA). That marked a nearly 1pc decline from the prior week and an 18pc drop from year-ago levels.
The inventory decline has been driven primarily by narrow blending margins in the US Gulf coast, where fuel oil inventories fell last week to 15.1mn bl, down by 6pc from the prior week and down by 18pc from a year earlier. Fundamentals to produce finished 0.5pc low-sulphur fuel oil (LSFO) are stunted as prices for blending components rose to record highs relative to the marine fuel amid an ongoing prompt supply shortage stemming from sanctions on Russian oil and products.
Russia accounted for more than 50pc of Gulf coast low-sulphur vacuum-gasoil (LSVGO), a prominent LSFO blending component, in the year before the US implemented sanctions on 8 March. Houston LSVGO settled at a $20.10/bl premium to finished LSFO on 31 May, the highest since Argus began assessing LSFO in late 2018.
In addition, components like atmospheric tower bottoms (ATBs) have consistently priced at mid- $20s/bl premiums to August ICE Brent crude this past week, or $8/bl higher than Houston finished LSFO assessments at August Brent +$17-18/bl for a 20 API gravity, fob Houston.
As a result, weekly refiner and blender net production of fuel oil plummeted to 62,000 b/d last week, a 22pc decline from a week earlier and the lowest since the week ended 22 April, according to EIA data.
Imports rebounding
Meanwhile, overall US fuel oil imports last week rose to 348,000 b/d as refiners sought replacement supplies following sanctions on Russia. Imports last week were the highest since the week ended 22 April, the last day banned Russian cargoes were allowed to arrive in the US.
In the week following 22 April, US fuel oil imports sharply declined, falling by over 55pc to 168,000 b/d. Since then, imports have steadily gained ground as US refiners turned to areas like the Middle East, Latin America and the Caribbean to replace Russian supplies.
Algeria, Mexico and Saudi Arabia dominated fuel oil arrivals into the US Gulf coast in May, according to oil analytics firm Vortexa. Nearly 46pc of total May fuel oil imports arrived from the Middle East, including countries like Turkey, Jordan, Iraq and Oman.
US fuel oil stockpiles may be poised to increase as imports gain momentum from outlying countries, but it remains to be seen when Houston LSFO blending margins will widen, given tight component supplies.
