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Asian fuel oil volatile on low grades, tight storage |
SINGAPORE: Poorer quality fuel oil flowing into this region and limited storage space are expected to spark wild price swings in Asia this year and could lead to sudden supply disruptions.
The problem will last until additional tank capacity is available by the end of the year, offering traders more space to blend cargoes that do not meet industry specifications into retail-grade quality, industry sources said.
In a sign of things to come, Asian premiums for fuel oil cargoes hit record-highs in early February, as bad weather hampered loadings in Europe while limited storage in Singapore curbed blending operations, before they slid just as abruptly.
“The quality of fuel oil arriving into the region is increasingly more cracked due to refinery upgrades at producing countries, especially in Europe, accounting for poorer quality arrivals,” said Singapore-based oil consultant Ong Eng Tong.
There had been two incidents of cargoes not meeting specifications since the start of the year, depriving the market of 200,000-300,000 tonnes and causing huge price volatility in East Asia, the world’s largest fuel oil market.
“Given the limited tankage in the region, it’s no surprise that players are getting more creative with their blending. But when there is a problem, there is not enough space to correct the specifications,” a Singapore-based Western trader said.
The problem could ease from the end of the year, when a total of 3.42mn cu m come onstream, bringing the total capacity in Singapore to about 9mn cu m.
Imported fuel oil cargoes, many of which barely meet the guaranteed specifications, are typically blended from raw cargoes of different viscosity and density grades as well as sulphur and water content, into consumable utility and marine fuel grades.
The task of correcting the quality of fuel oil into retail grades has become more difficult as tank space in Asia’s oil trading hub is limited in terms of volume per player. This is due to an influx of new players bearing increased supply volumes, and despite an additional 700,000cu m-800,000cu m (cu m) of tank space since last October.
Even if the issue of tight storage is addressed, a new terminal occupied by players with limited blending experience may not be able to adequately resolve the shortage of retail-grade fuel.
One Asian supplier had been unable to deliver marine fuels from its tanks for much of January/February, after most of its cargoes in storage, totalling more than 100,000 tonnes, were found to be off-specification.
At the time, premiums for the benchmark 180-centistoke (cst) grade surged to an all-time high of $10.90 a tonne from $4.40 just five trading sessions earlier. The prompt February/March timespreads also hit record-high levels of $17.50 a tonne on the same day.
Bunker premiums, the differential between marine fuel prices and fuel oil cargo values, hit a 17-month high of $21.75 a tonne on February 5, up from $10.65 two sessions earlier and well above average levels of $3.00-$4.00.
As quickly as it had risen, the bunker premium plunged to a two-month low of 10¢ a tonne on February 15, when the off-specification cargo was corrected to retail grade and last month’s Western volumes started arriving.
A second problem involving a cargo’s excessive water content emerged in late February, pushing bunker premiums back up to $3-$4a tonne.
The 260,000-to-280,0000-tonne cargo aboard a very large crude carrier (VLCC) from the Caribbean, contained 0.8-0.9% of water, above the standard specification of 0.5%.
The problem of poor quality fuel oil is expected to wane next year when additional storage capacity comes into operation. But some traders cautioned that the extra storage will be limited to those who have taken up space at the new facilities.
And if inflows of such poor quality cargoes increase correspondingly, the problem could persist, as at least 400,000 bpd of new hydrocracking capacity will come onstream between January 2006 and end-2007 in Europe.
Two new storage facilities – Hin Leong’s Universal Terminals and Chemoil’s Helios Terminals with a combined capacity of 2.7-2.8mn cu m – are expected to start operations by end-2007 or early-2008.
Existing storage operators such as Royal Vopak and Horizon Terminals will add 216,000 cu m and 450,000 cu m respectively by next year. – Reuters
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