Viewpoint: Turnarounds, weather to drive US fuel oil

Wholesale fuel oil markets across the US face uncertain price pressure heading into 2023, as seasonal heating demand in the northeast and Gulf coast crude unit turnarounds have the potential to siphon supplies in currently saturated regional markets.

As major crude distillation units (CDUs) head into turnaround, supplies of both high-sulphur fuel oil (HSFO) and low-sulphur blending components — such as slurry oil, atmospheric tower bottoms and vacuum-gasoil (VGO) — may tighten, allowing prices to rise after bottoming out this winter. This will bolster blending component costs in the event of short supply and allow 0.5pc low-sulphur fuel oil (LSFO) differentials to rise versus the crude basis.

Planned CDU maintenance is expected to begin at a 584,000 b/d Baytown, Texas, refinery, in the first quarter of 2023 as well as potential crude turnarounds at a 160,000 b/d Houston, Texas, refinery and a 325,000 b/d Port Arthur, Texas, refinery.

If Gulf coast coking units experience maintenance, HSFO may lose a potential outlet for feedstock demand, and prices could fall further, after hitting $51/bl on 6 December, the lowest since February 2021, as supplies rise without a home.

Similar to the US Gulf coast, a cold northeast winter could instigate a drop in fuel oil supply and return 0.3pc sulphur fuel oil prices to unprecedented highs, should the distillate, natural gas and coal sectors experience unexpected price surges.

A looming concern market participants face is the potential for thin distillate supply on the US east coast, as transatlantic shipments to the region remain subdued following a global supply shock this year. Should heating demand surge, distillate markets remain vulnerable to national supply tightness, increasing the potential for end-users to turn to No.2 home heating oil. That could sap supplies of 0.3pc sulphur fuel oil as it is used as a blendstock for No.2.

Mild weather conditions tempered demand for 0.3pc sulphur fuel oil in the New York Harbor in early December, until a US arctic blast sent 0.3pc sulphur fuel oil prices last week above $106/bl, the highest in a month. Cash prices may subside in the first weeks of 2023, which could ease supply concerns, as above-average temperatures are expected to cover New England through 12 January, according to the private forecaster Commodity Weather Group.

Overall, fuel oil demand was projected to remain lackluster in the Gulf coast and Atlantic coast prior to the first quarter of 2023,as ad valorem taxes assessed on inventories at year-end discourage buyers from purchasing inventory to carry into the new year.

A volatile year in review

Residual fuel oil in the US Gulf coast saw unprecedented price volatility in 2022, as values for both low- and high-sulphur grades surged to all-time highs on 8 March, directly following US sanctions on Russian refined products following the invasion of Ukraine — only to plummet this fall and winter.

Houston 0.5pc LSFO prices in early March struck $143.73/bl, while 3.5pc HSFO in the Gulf rose to $113.65/bl, the highest in Argus pricing history dating back to 2018 for LSFO and to 2016 for HSFO. Russia accounted for nearly 80pc of Gulf coast fuel oil imports in 2021, according to oil analytics firm Vortexa.

Prices proceeded to wane marginally by late March and throughout April, as a grace period allowed pre-ban cargoes to discharge to the US until 22 April.

Values once again began a steady rise this past summer, driven by climbing Ice Brent crude futures as a well as a prompt barge shortage of the import-driven product, low-sulphur vacuum-gasoil (LSVGO), in the US Gulf coast. LSFO barge prices spiked to $142.08/bl on 8 June, just $2.65/bl shy of the high reached in March, as LSVGO reached well above $30/bl over Brent crude and peaked at Brent +$35.495/bl on 17 and 21 June, the highest mark in Argus price history.

By early fall, US Gulf coast refiners began seeking new fuel oil avenues from the Middle East and Latin America, as a prompt diesel shortage struck the globe, and refinery utilization rates spiked in the US to maximize distillate production. In turn, with heavy grade fuel oil and LSFO blending components a byproduct of CDUs, regional fuel oil supplies skyrocketed to levels last seen in mid-2020, even with sanctions in place.

Alongside ample supplies of components, which reduced blending costs, Houston LSFO barge cash differentials swung to a discount to Ice Brent crude by mid-November, hitting as low as $3/bl below the crude complex on 18 November, or the lowest differential assessment seen in Argus history dating to March 2021.

Gulf coast LSFO barges averaged $2.27/bl below crude for a 20° API gravity in December. Levels are projected to remain subdued to start 2023 with lackluster demand, until turnarounds spark a shift in supply.

By Kayla Meyertons