The straight-run fuel oil market was under pressure in the first half of the year — particularly for heavy grades — and that pressure will continue as US and Chinese refiners take less heavy sour Russian feedstock, exploiting access to new crude sources.
Transatlantic shipments of Russia's high-sulphur straight-run fuel oil blend M-100 have fallen sharply this year. US refiners had typically been large consumers of alternative feedstocks from Russia, and complex Gulf coast plants take 80-90pc of US-bound M-100 shipments. M-100 largely comes from atmospheric distillation of medium sour Urals crude and usually has a 3pc sulphur content. But imports of unfinished residue from Russia — which include straight-run fuel oil — were just under 100,000 b/d in January-April, less than half the levels seen in 2013, EIA data show. By contrast, vacuum gasoil (VGO) imports have risen to 130,000 b/d, more than double the amount shipped three years ago.
Rising shipments of heavy Canadian crude are edging out M-100 from the US feedstock slate. Independent PBF Energy has stopped importing M-100 for its 180,000 b/d Paulsboro and 190,000 b/d Delaware City refineries on the east coast, as it takes more heavy Canadian crude. And Valero has halted straight-run fuel oil imports to its 200,000 b/d Corpus Christi refinery in Texas, as it maximises runs of light sweet Eagle Ford crude. M-100 is also a feedstock in bitumen production, and is being edged out of the US by shipments of bitumen from Canadian oil sands projects. As heavy crude production in North America continues to rise, this trend is expected to continue in the second half of the year.
Russia receives more money for M-100 sales in Asia-Pacific, where it trades roughly $120/t above the market in northwest Europe. M-100 is popular with independent Chinese refineries that do not have licences to import crude. But demand is shrinking, as crude becomes available to more refiners. Beijing granted a licence to ChemChina nearly two years ago to import 200,000 b/d of crude, and the firm has been processing more Russian ESPO Blend lately. China's M-100 imports fell by 30pc to just under 100,000 b/d last year. And with the possibility of crude import licenses being extended to more independent refineries in China, the country's M100 imports are expected to fall further.
Russian refiners export M-100 because fuel oil export tariffs are still only 66pc of the value of the tariff for crude. Mini refineries put Urals crude through light distillation processes to benefit from the tax differential. Moscow plans to equalise the two rates to encourage refiners to upgrade and process more crude domestically. The move could be made next year, although no firm date has yet been announced. Russian straight-run fuel oil exports - mostly from Black Sea and Pacific ports - will fall by around 85pc by 2020 as a result, according to Russian state-controlled Rosneft. Russian M100 supplies tightened during the spring with Russian refinery maintenance, which gave some support to premiums to barges. But decreased exports to the US Gulf and Asia Pacific capped further gains in premiums.
Unrest has kept Libya's 220,000 b/d Ras Lanuf refinery shut, cutting around 70,000 b/d of good quality low-sulphur straight-run exports from the plant. But a deal reached in early July to reopen the Ras Lanuf and Es Sider crude export terminals are expected to pave the way for the return of the refinery to operational status. The return of Libyan exports will have a bearish impact on LSSR prices because Libya was forced to import the product for power generation as it faced domestic refinery shutdowns. According to state-owned NOC officials, Libya was importing around 50pc of its consumption. Libya consumed around 1.56mn t of LSSR for power generation in 2012 according to NOC figures.
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