Viewpoint: Crude runs, vaccine to set 2021 fuel oil

The US residual fuel oil market will continue to see prices recover into the new year if crude runs stay low and a Covid-19 vaccine becomes available to stimulate shipping demand.

Crude run rates in US Gulf coast refineries will be the primary driver for the rise or fall of low-sulphur fuel oil (LSFO) barge prices into 2021. As an active hurricane season and a heavy turnaround schedule slowed runs this fall in the US Gulf, LSFO blending component availability tightened, cutting prompt supply and boosting prices. In addition, weak margins lowered refinery utilization rates and production of intermediates such as vacuum gasoil, slurry oil, atmospheric tower bottoms and vacuum tower bottoms — all of which could potentially be used to blend LSFO.US Gulf coast LSFO prices averaged at $56.10/bl from 1-28 December, the highest since early March.

The wholesale fuel oil market will be dependent on the speed at which Covid-19 can be brought under control. Should a vaccine revive the economy and return fuel demand, US refinery runs may begin to recover, returning supplies to the LSFO blending pool. LSFO wholesale inventories are then anticipated to rise in 2021.

A recovery in global demand could reopen the fuel oil arbitrage out of the US Gulf coast to Singapore, the world's largest bunkering hub. The arbitrage has been shut for most of 2020 because of subdued vessel traffic.

The rise of long-haul shipments in global waters could also stimulate the flow of Russian M100 straight-run fuel oil barrels from the Baltic sea to US refineries. Russian M100 barrels are traditionally used as a feedstock in Gulf coast refinery coker units to increase middle distillates production amid a tightly-supplied heavy crude market.

Coker margins thinned this year with the reduction of refinery utilization rates, driving Russian fuel oil exports to the US to a near two-year low of 1.9mn bl this November.

High-sulphur fuel oil (HSFO) is expected to find more interest when Covid-19 vaccinations enable cruise ship companies to continue voyages, raising LSFO and HSFO demand in the Caribbean. Several cruise ship companies have approximately 40-65pc of their ships outfitted with marine exhaust scrubbers, which enables them to burn HSFO in compliance with International Maritime Organization's (IMO) 0.5pc sulphur cap that went into effect this year. Gulf coast HSFO prices averaged at $34.30/bl from January-November this year, down 37pc from the same period a year ago.

By Kayla Meyertons