VLFSO refining margins spike this week

Asian refiners’ profit from producing very low sulphur fuel oil (VLSFO) rose to a one-year high this week, setting the stage for a trend that could persist throughout the year, traders and analysts said.

Energy Aspects believes that tightness in the fuel oil complex will remain a common theme through 2021, especially as the tightness in crude ensures that any uptick in margins will be transferred straight to crude producers if OPEC+ producers can hold their nerve.

The front-month VLSFO margin was at $15 per barrel above Dubai crude, it’s highest since February 20 and up from $11.75 a barrel at the start of the year, according to Refinitiv data in Eikon.

“VLSFO refining margins have spiked this week amid tightness in the Asian market. In fact, offshore VLSFO inventories in Singapore dropped to a record low of 10.7 million barrels,” said Sri Paravaikkarasu, director for Asia oil at FGE.

Prices gained as investors are betting that fuel demand will rise while the organization of the Petroleum Exporting Countries (OPEC) and its allies, known as OPEC+, kept a lid on supply.

Fuel oil flows into East Asia, most of which comes to the Singapore trading and storage hub, were assessed at 4.5 million to 5.5 million tonnes in February, down from 5.63 million tonnes in January, according to Refinitiv Oil Research.

While rising prices could prompt producers to increase output of the fuel over the near term, sustained refinery production cuts and resilient demand could keep VLSFO prices supported throughout the year, said three traders involved in the fuel oil market.

“We should see incremental VLSFO volumes from the Middle East arriving in Asia this month. This will coincide with a seasonal pullback in Asian bunker demand (from March) and lower (low-sulphur fuel oil) needs from Northeast Asian power producers,” said Paravaikkarasu.

“Overall Asian product cracks have been able to creep higher on support from a cold winter and optimism about vaccines despite renewed restrictions pressurising demand in the short term,” said George Dix, oil analyst at Energy Aspects.


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