SINGAPORE: Cheap crude prices have taken the shine off once-popular Russian fuel oil, depressing premiums of the high-quality heavy distillate by around 30 percent as sellers struggle to place these barrels, traders said.
Crude oil prices have more than halved from last year's peak above $115 a barrel, encouraging Asian refiners to ramp up production at their crude-fed units, a break from the previous trend where refineries maximised their secondary units to process heavy fuel oil instead of crude.
The flip has suppressed demand for Russian M-100 fuel oil.
"The straight-run fuel oil premium has dropped a lot," said a trader linked to a South Korean refiner who had received offers for the oil.
"At a premium of $80 a tonne (on a delivered basis), it was not economical for us at that time," he said, referring to an offer for a February-to-March-arrival M-100 cargo from Nakhodka.
Late last year, Russian Mazut-100 loading from the far eastern ports of Nakhodka and Vanino were sold at premiums as high as about $110 above Singapore spot quotes for the 180-centistoke, on a delivered China basis. Similar grades would currently sell at premiums ranging from $75 to $80 a tonne, a Singapore-based fuel oil trader said.
Russian M-100 SRFO, the first-cut of the heavy distillate after crude oil is processed, has been favoured by Chinese and South Korean refiners for its high yield of gasoil.
The front-month fuel oil crack, which measures the product's relative value to Dubai crude, is now 60 percent stronger than the trough of minus $14.39 a barrel reached on June 19. A weaker relative value of fuel oil against crude makes refining fuel oil more economical.
The lack of demand for SRFO has kept some Asian refiners from renewing their SRFO term contracts, which are usually priced above Singapore 180-cst spot quotes regardless of the fuel origin.
"If they want me to buy now, they have to show me the cargo under Singapore spot quotes. That means there is no demand," an Asian refiner said.
"Recent refining margins are too good to use feedstock instead of crude," he said.
Refining margins, basis Singapore, have ranged between around $7.50 and $9.50 a barrel over January to March, as compared to $5 to $7.50 a barrel over October to December.
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