Asian oil refiners' shipping fuel profits grow on IMO 2020 demand

Asia’s oil refiners are starting to see a surge in demand for cleaner fuels that is pushing up processing profits for very low sulfur fuel oil (VLSFO) and gasoil just weeks before new rules take effect for fuel products burned in ships.

Most ships have to switch from high-sulfur fuel oil (HSFO) to cleaner fuels such as VLSFO and marine gasoil (MGO) when new sulfur emissions rules set by the International Maritime Organization (IMO), known as IMO 2020, start on Jan. 1.

Ships will have to use fuels containing not more than 0.5% sulfur, compared with 3.5% now, unless they are equipped with exhaust-cleaning “scrubbers”.

The oil industry stocked up on IMO-compliant fuel, expecting high demand and a big boost in profits ahead of the rules taking effect, but ship owners kept their purchases to a minimum until this month, delaying a run-up in demand that refiners had expected earlier in the fourth quarter.

“Although the improvement (in margins) would not offset (overall) concerns in the fourth quarter, it could be a silver lining. It gives a stronger positive sign for next year,” said a spokesman from SK Innovation, owner of South Korea’s top refiner SK Energy.

Refining margins or cracks for VLSFO rose above $20 a barrel this month, while cracks for gasoil with a sulfur content of 10 parts per million (ppm) for January delivery were about $1 higher than those for December, encouraging refiners such as South Korea’s Hyundai Oilbank to increase output in January.

A Singapore-based marine fuels trader estimated that VLSFO supplies may be enough to meet only half to 70% of the near-term demand, based on sales of about 8 million to 9 million tonnes of marine fuels in Asia and the Middle East per month.

The shortfall would have to be filled in with marine gasoil, boosting refiner profits for both fuels, the trader said.

Besides slower-than-expected demand for IMO-compliant fuels, weak domestic demand for gasoil in India and China pushed up export volumes, battering the fuel’s margins, which have shed 18% over the past couple of months.

But gasoil profits could rebound to about $20 a barrel in the next few months as more ships switch to MGO and as simple refineries cut output on low HSFO margins, according to Goldman Sachs and energy consultancy FGE.

“Despite the ample availability of VLSFO, we still expect MGO demand to receive support in the coming weeks, when more vessels start switching to use compliant fuels,” said Sri Paravaikkarasu, FGE’s director for Asia oil.

The new demand from ships could boost gasoil consumption by 1 million to 1.35 million barrels per day next year, according to Wood Mackenzie and Energy Aspects.

Reporting by Jane Chung in SEOUL, and Koustav Samanta and Roslan Khsawneh in SINGAPORE; Editing by Florence Tan and Tom Hogue

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