Fuel Oil
Market Overview
HSFO and VLSFO cracks remain stubbornly positive as bunker fuel availability becomes an issue into April.
Cash diffs and spreads have generally eased as initial panic buying and massive backwardation have pulled available molecules to market quickly.
Paper is underestimating the sustained impact 3 months down the curve - lower crude runs mean structurally lower fuel oil supply across Asia.
The market is not fully pricing the medium-term tightness from reduced refinery throughput, arbs alone will not solve the shortfall.
Iraq exporting 650 kt/month for Q2 through Syrian ports on tanker trucks, but we are still 500-600 kt/month short of the usual legitimate Iraqi HSSR in the market.
Asian refineries losing the key medium sour crude from the AG translates to lower VGO and SR yields to feed secondary units.
With middle distillate cracks roofing, refineries will push VGO into hydrocrackers first before FCCs. Baseoil will be last priority as quality requirements are difficult to meet without AG crudes.
For SR, preferential routing will be into cokers, visbreakers and thermal gasoil units. Bitumen will suffer in production as it requires very specific qualities typically found in the heavier grades like Kuwait and Basrah Medium.
There will be a need to sustain the LRCCUs at min intake as well. The amount of low sulphur streams is already a lot lower due to massive run cuts everywhere.
These trends further support our view that Singapore bunker fuel production will be significantly lower and the current Q3 cracks are undervalued.
