Saturday, May 9, 2009

>Asia fuel oil strengthens but demand doubts remain

Singapore - Expectations of tightening supply is lifting sentiment in Asia's physical fuel oil market this week, but it remains to be seen whether this strength can be sustained against the weight of a suspect demand outlook.

The global economic slowdown slashed demand for residual fuel in the core marine and power sectors in the first quarter, causing stocks to build up to 21 million barrels as of Wednesday in Singapore, Asia's oil hub.

Supply may tighten in May, however, as the Europe-to-Asia arbitrage window has closed and refineries are expected to produce less fuel oil during the second quarter maintenance season.

"May crude runs are likely to be lower," due to poor margins, an Indian refiner said.

Refineries in several Asian countries, especially those in Japan, plan to reduce crude runs in the April-June quarter by at least 10% on year, as refining margins have been cut by weak distillates demand.

Supply cuts by the Organization of Petroleum Exporting Countries have also made heavy sour crude more expensive, causing some refiners to switch to lighter grades with lower fuel oil yield, traders said.

Asia, which gets the bulk of its residual fuel supply from the West, is unlikely to get more supply from Europe in May as the arbitrage window is "closed by a few dollars," a Singapore trader said.

While there is still some time left to fix May arrivals, there isn't much oil in Europe "to be pointed this way", he said.

Some of the Middle Eastern supply has recently been diverted to Europe, and exports from the region could fall as domestic demand starts to build up in June with the start of the Middle Eastern summer, traders said.

Weak Demand Weighs

On the demand side, lower fuel oil prices earlier this week have drawn inquiries from the key China market, and buying from Japan, South Korea, Vietnam, Taiwan and Indonesia has rebounded slightly.

Wholesale gasoline and diesel prices in China are rising and could prompt independent refiners to raise operating rates. These refiners use straight-run fuel oil as feedstock, as they aren't allowed to import crude oil.

"It's easy to raise prices (of oil products) but hard for them to fall. So the government is likely to maintain prices at current levels to ensure healthy refining margins," a Chinese trader said.

In Japan, low-sulfur fuel oil demand revived after Tokyo Electric Power Co. failed to restart its Kashiwazaki-Kariwa nuclear power station.

Pakistan State Oil's large fuel oil requirements for May-July could also help to tighten supply in the Middle East.

But some traders doubt that the demand is sustainable.

China's demand could wither if crude continues to recover and push fuel oil prices higher, they say.

High stocks and large inflows due in April also continue to weigh on sentiment.

"There's still an awful lot of oil on its way," the Singapore trader said.

"It's far more than what we need in Singapore and bunker demand is still subdued," he said.

Average monthly bunker sales at Asian ports this year have fallen about 10%-20% on year, according to traders estimates.

Tepco is still keen to restart its nuclear plant by summer, and if liquefied natural gas prices drop as expected it could pull some operators away from fuel oil.

Meanwhile, exports from the U.S. and Carribean Sea to Asia could rise in May to "well over 2 million tons", a second Singapore trader said, adding that some of these cargoes had originated from Europe.

"I am not convinced we're going to be tight. Demand is still falling and we don't need that much oil," he said, pointing out that the market is still in contango.

"The key is whether the Middle East will slow down (fuel oil) exports, but their (domestic) demand is falling as well. We're already seeing May barrels from Saudi Arabia," he said.