Viewpoint: Tighter supply to support Asia fuel oil

The Asia-Pacific fuel oil market will find support in the first quarter of 2019 from a decline in regional supplies, as refineries in India and the Mideast Gulf resume full operations at secondary units that in some cases have been off line since 2016.

The declines in fuel oil production, both in Asia and globally, may offset weaker demand for high-sulphur fuel oil (HSFO) as a power generation fuel in 2019.

Abu Dhabi's state-owned Adnoc is planning to restart the 127,000 b/d residual fluid catalytic cracker (RFCC) at its 417,000 b/d Ruwais 2 refinery at the end of this year. The unit has been closed since it was hit by a fire in January 2017.

The restart will prompt Adnoc to end its term sales of straight-run fuel oil (SRFO) after December, potentially cutting availability to the market by around 360,000-450,000 t/month (77,000-97,000 b/d). This may squeeze secondary unit feedstock supplies at Asia-Pacific refiners, which take Adnoc's SRFO from the feedstock supply pool.

India's state-controlled BPCL is also due to start up a fire-hit hydrocracker at its 240,000 b/d Mumbai refinery in late December, potentially ending all 180cst HSFO exports from the refinery from the first quarter of 2019 onwards. BPCL has exported about 120,000-160,000 t/month of 180cst HSFO fuel oil since the fire in August.

Russian supplies fall

Shipments of fuel oil to Singapore from major producers have also fallen. Singapore received only around 8mnt of fuel oil from Russia in January-October 2018, down from over 10mn t of fuel oil from Russia during the same period. Arrivals have gradually slowed in recent years as Russian refineries are upgraded to destroy fuel oil production.

The decline in fuel oil production from Russia has also cut availability in the European market this year. The tightness was exacerbated by the start-up of ExxonMobil's new 50,000 b/d delayed coker unit (DCU) at its 310,000 b/d Antwerp refinery, cutting European fuel oil production by 200,000 t/month. And Shell started a new solvent de-asphalting (SDA) unit at its 420,000 b/d Pernis refinery in the Netherlands in October, cutting production of high-viscosity and high-density fuel oil.

The refinery upgrades in the west of Suez market have likely contributed to the decline in arbitrage inflows to Singapore in 2018 — a pattern that will continue into at least the first quarter of 2019, with regional demand weakening.

Fuel oil buying by the power generation sector continues to dwindle, particularly in Pakistan. The country has banned fuel oil imports for at least three months from December following a rise in domestic inventory caused by slow demand from utilities. This has helped undercut expectations of a stronger market during the winter season, although demand from northeast Asia and Saudi Arabia might lend some support.

South Korean utility East-West power (EWP) resumed operations at its fuel-oil-fired power plants this week ahead of the winter season, when electricity demand increases. The utility's three plants in Ulsan have been off line for the last 3-4 months. EWP is likely to buy fuel oil to burn during December, said traders, although this could not be confirmed with the company. Korea District Heating (KDHC) also emerged with a rare tender to import 1-2 cargoes of LSFO with maximum 0.3pc sulphur, density of 0.88-0.97g/ml and viscosity of 40-380cst for delivery from 23 December to 5 January and 11-25 January. KDKC last bought LSFO for October delivery to Pyongtaek.

Mideast Gulf demand

Saudi Arabia's Yanbu power and desalination plant phase 3 and Jizan power plant started commercial operations in the third quarter of 2018, with the start-up of the former delayed since 2016. Each project can take at least 300,000-400,000 t/month of HSFO, adding to Saudi fuel oil demand. The country can import around 1.5mn-2mn t/month of HSFO during the summer. But PetroRabigh, which produces 89,000 b/d of 380cst 3.7pc sulphur fuel oil, ships out most of its fuel oil cargoes to Jizan on the Red sea coast.

One major new market factor — the International Maritime Organisation (IMO) plan to implement a 0.5pc global sulphur cap on marine fuels in 2020, down from 3.5pc now — is unlikely to affect consumption of 3.5pc sulphur fuel oil during the first quarter of 2019. The marine fuel industry is focused on finding ways to comply with the IMO regulations, with a number of cargo suppliers already marketing their 0.5pc sulphur fuel oil to shipowners for trials ahead of 2020.