By Yuji Okada and Yee Kai Pin
(Bloomberg) -- Fuel oil shipments to Singapore may increase as much as 10 percent next month as prices rise in Asia, encouraging exports from Western Europe, Russia and the U.S. Gulf of Mexico.
Asia’s demand for fuel oil, the residual waste from refining that’s used to generate electricity and power ships, is being driven by Middle East utilities providing power for air- conditioning and a recovery in shipping as the global recession eases. The additional cargoes in Singapore may cap fuel oil’s gain against crude, known as the crack spread, the traders said.
“The key to predict fuel oil prices for the coming months is power companies’ demand in the Middle East,” said Yasuhito Imaizumi, a Singapore-based bunker trading manager at Petro Summit Pte, a subsidiary of Sumitomo Corp. “The market will be quite sensitive to activities among Middle Eastern power companies in the run-up to summer season.”
The discount of Singapore 180-centistoke high-sulfur fuel oil, the Asian benchmark, to Dubai crude oil was $5.44 a barrel yesterday, narrowing about 40 percent this month because of reduced shipments compared with April.
Saudi Arabia, which burns crude and fuel oil for power generation, may use more fuel oil this summer after the average price of New York crude futures so far this year rose 67 percent from a year earlier.
BP Plc, Statoil ASA and Litasco, the trading unit of OAO Lukoil, Russia’s largest non-state producer, hired Very Large Crude Carriers to load European fuel oil for next month’s delivery to Singapore, according to reports from three shipbrokers. Supertankers Gemini Glory, Front Commander and Kazimah III were chartered for as much as $5 million. Rates on the route were about $4.25 million in April and $3.9 million in March.
ConocoPhillips, Trafigura Beheer BV and PowerSeraya Ltd. have booked three more VLCCs to load fuel oil in early June from the U.S. Gulf or the Caribbean for delivery to Singapore, shipbrokers said.
Shipments of Russian straight-run fuel oil, used to feed vacuum-distillation units at refineries, may increase in June, two traders said. Straight-run fuel oil is a residue that comes directly from crude distillation.
“These ex-Russia cargoes might be diverted to Singapore from the U.S. in June as run rates at U.S. refineries fell,” said Akira Kamiyama, a Tokyo-based trader at Mitsui & Co.
Refinery utilization rates in the U.S., the world’s largest energy consumer, have fallen three straight weeks after reaching 89.6 percent of capacity, the highest since May 2008. Run rates were at 87.8 percent in the week ended May 21, the Energy Department said yesterday.
The premium of 180-centistoke fuel oil to 380-centistoke grade, also known as the viscosity spread, has tumbled 84 percent so far this month to $1.75 a ton because of increased demand from ship owners that use lower-quality bunker.
“The recent drop in fuel oil prices stimulated ship owners appetite for bunker fuel,” Imaizumi said.
Singapore 380-centistoke bunker fuel has fallen 16 percent in May, Bloomberg data show. Sales in the city-state, the world’s largest bunkering port, rose to a record 3.42 million tons in April, up 2.7 percent from the previous month, according to data compiled by the Maritime and Port Authority. Sales were up 19 percent from a year earlier.
Increased supplies of blending stock, used to reduce the viscosity of fuel oil, also accelerated the momentum of narrowing the spread.
Fuel oil’s viscosity spread rose to a 15-month high of $13.50 a ton on March 10 on increased shipments of high- viscosity fuel oil from Europe and a shortage of blending grades from the U.S.
The premium of Asia’s benchmark gasoil to Dubai crude oil has gained 65 percent so far this year to $10.14 a barrel on May 26, data compiled by Bloomberg show.
Traders forecast the viscosity spread will widen next month because refiners produce less blending material when they produce more gasoil.
“Given the good gasoil crack, viscosity spread should widen to $10 a ton,” Mitsui’s Kamiyama said.
--Editors: Clyde Russell, Jane Lee.
To contact the reporters on this story: Yuji Okada in Tokyo at firstname.lastname@example.org; Yee Kai Pin in Singapore at email@example.com
To contact the editor responsible for this story: Jane Lee at firstname.lastname@example.org