Re-emerging supply, lower demand push down oil refining margins
SINGAPORE (Reuters) — Profits on refining fuel oil have been hammered to multi-month lows over the past two weeks on emerging signs of growing supply and faltering demand, retreating from stubbornly elevated levels at the start of the quarter.
By the end of October, fuel oil refining margins in Singapore were around 30% higher than the same time a year ago.
They were boosted by expectations that the Organization of the Petroleum Exporting Countries would continue propping up crude oil prices by withholding supplies of fuel oil rich grades, as well as by lower output from key producers like Russia and Venezuela.
But some indications of growing supply and weaker demand conditions have recently dragged on fuel oil refining margins, four trade sources said. They all declined to be identified as they were not authorized to speak with media.
"It's not too surprising (that margins have fallen)," said one Singapore-based fuel oil trader. "Fundamentals are looking slightly weaker and (refining) margins were probably over-extended."
The discount of the Rotterdam 380-centistoke high-sulfur fuel oil to benchmark Brent crude for January settled at an eight-month low of $9.21/bbl on Wednesday, sharply down from the $7.51/bbl discount at the start of November.
Pakistan State Oil (PSO), a key Asian fuel oil consumer, recently cancelled a tender to import up to 565 Mt of fuel oil for January delivery and announced it would suspend imports of the fuel as the country turns to LNG to fuel its power sector.
PSO in 2017 imported an average of about 400 Mt to 650 Mt of fuel oil a month, and its lower fuel oil demand has this week driven stocks of the fuel in the Fujairah oil hub in the United Arab Emirates, where most of its imports are sourced, to a more than four-month high.
In the Singapore storage hub, fuel oil inventories also climbed to a five-week peak, the latest official data showed.
Meanwhile, fuel oil coming out of Mexico is on the rise. Exports could climb by 250 Mt to 400 Mt by January following the restart of the Salina Cruz refinery on the country's Pacific coast, two Singapore-based fuel oil traders said.
Since the start of August, Singapore fuel oil imports from Mexico have totaled 290 Mt compared to the 960-Mt imported over the same period in 2016, official data shows.
In June, Salina Cruz was shut due to a fire caused by flooding from a major storm and began operating briefly at the end of July before being hit by a major earthquake in September. When operational, Salina Cruz can process up to 330,000 bpd.
Reporting by Roslan Khasawneh; Editing by Joseph Radford
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