Asian refiners trim July LSFO output, exports on flagging regional demand

Singapore — With low sulfur fuel oil crack spreads in Asia under pressure from oversupply and lackluster demand, refineries in Thailand, Taiwan and South Korea are reducing their July LSFO production and exports, company sources at regional refineries said July 6.

"For July, we've balanced our supply to just meet our domestic LSFO bunker term commitments, as the LSFO margins right now are weak, so we'll probably skip [LSFO] exports this month," a refining source close to Taiwan's CPC Corporation said. "We're likely to have a cargo to export in early August instead," she added.

The Asian LSFO crack spread, measured as the difference between the front-month Singapore Marine Fuel 0.5%S swap and the Dubai crude oil swap, was assessed at $7.83/b on July 3, marginally higher than the Q2 average of $7.47/b. The July 3 spread is, however, a quarter of the $29.77/b spread on Jan. 2, after the International Maritime Organization's regulations on cleaner marine fuel came into effect on Jan. 1, S&P Global Platts data showed. The crack spread averaged $6.76/b over June.

LSFO PRODUCTION CUT BY UP TO 50%

In response, refineries in South Korea, Taiwan and Thailand -- which have exported LSFO cargoes to Singapore in H1 2020 --have started reducing their LSFO production towards the end of the second quarter, in some cases by as much as 50%, and have cut exports to focus on domestic bunker demand.

"Our maximum LSFO production capacity is around 300,000 mt/month, but we're producing less than 200,000 mt/month, about 40% less," a source close to South Korean refiner Hyundai Oilbank said.

"Low sulfur bunker demand [in South Korea] has been fairly stable at approximately 600,000-650,000 mt/month, but we're also facing increased competition from ports like Shanghai, so the bunker premiums [in South Korea] have not increased much," said a source at South Korean refiner SK Energy, which is producing at 50% of its LSFO production capacity of 400,000 mt/month.

SK Energy has sold 40,000 mt of LSFO for July loading from its Incheon refinery, unchanged from June, another company source said.

The average difference between delivered low sulfur bunker prices at South Korea and Shanghai stood at $6.17/mt over Q2, versus the Q1 average of minus $18.90/mt, when South Korean prices were lower, Platts data showed.

FOCUS SHIFTS TO DOMESTIC DEMAND

The situation is no different in Taiwan and Thailand, where most refiners have yet to offer any July-loading LSFO spot cargoes for export due to low margins, preferring instead to focus on domestic demand, or in the case of Taiwan's Formosa, adjust to temporarily producing higher sulfur cargoes while run rates at its three crude distillation units are reduced, company sources said.

Formosa has not sold any LSFO for loading in July, although the last two cargoes it sold, each 40,000 mt and loading over H1 June and mid-July contained 0.9% sulfur, higher than the maximum 0.5% sulfur specification they typically produce, according to traders who participate in the company's tenders.

CPC and Thaioil sources have also said they're likely to give July LSFO exports a miss, as margins have failed to improve significantly amid weak demand.

PTT Global Chemical, the biggest LSFO exporter in Thailand, sold 60,000 mt of IMO-compliant fuel oil for July loading, down from 70,000 mt for June loading. The company normally supplies LSFO for the domestic market, while the balance is exported. "Domestic bunker demand is recovering," a PTTGC source said.

Low sulfur bunker fuel demand across most of the region has been impacted by the spread of the coronavirus, with at least six bunker suppliers in Singapore surveyed by Platts estimating a 10% decline in June low sulfur bunker fuel sales at the world's largest bunkering hub. Sales totaled 2.66 million mt in May, data from the Maritime and Port Authority of Singapore showed. Singapore sold 3.11 million mt of Marine Fuel 0.5%S bunker in January.

DEMAND FOR STRAIGHT-RUN FUEL OIL AS CHEAPER FEEDSTOCK PICKS UP

As part of the strategy to reduce LSFO production, refiners are simultaneously trying to maximize production of lighter distillates like gasoline and gasoil, which are seeing a faster recovery in demand.

Thus, straight-run fuel oil has increasingly become the preferred feedstock for some of these refiners, especially in South Korea and Thailand, as rising crude oil prices have also crunched LSFO production margins.

In Thailand, a source close to refiners ThaiOil and IRPC confirmed that both companies were "looking to procure [straight-run fuel oil] for their refineries, loading over H1 July," for the first time this year, although the source was not sure which refinery will finally receive the cargo as negotiations are ongoing.

South Korea's S-Oil and SK Energy, meanwhile, have also procured their first straight-run fuel oil cargoes this year for July delivery, and in SK Energy's case, August as well, company sources at both refineries said.

S-Oil recently bought the 35,000 mt straight-run fuel oil cargo -- its first ever purchase -- loading from Singapore over July 6-8, while a source close to SK Energy said the refiner had purchased "almost 200,000 mt for the next two months."

Fellow refiner Hyundai Oilbank has also expressed an interest in procuring straight-run fuel oil cargoes as feedstock, and is currently looking for cargoes for its August production schedule, according to a company source, restarting purchases for the first time in over a quarter, with its last straight-run cargo purchased in March.