What impact is Dangote’s ramp-up having on the global fuel oil market?

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Gary Clark:

Hello and welcome to the Platts Oil Markets podcast by S&P Global Commodity Insights, where today we'll be talking about fuel oil, which is predominantly used in the marine sector, and the prices for which have weakened considerably in the European markets on the back of the residue fluid catalytic cracker or RFCC outages at the Dangote Refinery in recent weeks. The RFCC is the Dangote Refinery's main gasoline engine. And while recently coming out from three weeks of maintenance, it stopped again at the beginning of September to deal with production issues. We've talked a lot in these podcasts about the Dangote Refinery with respect to gasoline markets, the fuel the refinery is optimized to produce, with the complex still producing gasoline from its 120,000 barrel per day reformer. But the 150,000 barrel per day RFCC upgrades residual fuel oil to gasoline and affects the balance for fuel oil in Europe as a result.

I am Gary Clark, and I manage the EMEA clean refined products price reporting team based out of London. I'm joined by Charlie Wright, who manages the EMEA fuel oil team, Joseph Jaffe, who reports on fuel oil pricing, and Kelly Norways, who sits on the downstream oil news team. Welcome. Kelly, what's the latest with respect to the Dangote Refinery, the RFCC outages, and its production of fuel oil?

Kelly Norways:

Sure. So the RFCC and what it's been doing at Dangote has been the million-dollar question for the last year or so. By now, a lot of people in the market are familiar with what's now Africa's largest refinery. It's a huge 650,000 barrel per day complex, and it wasn't designed to make residual fuel. The whole project was to make Nigeria self-sufficient in its gasoline supply, which is its main fuel type. And the whole complex is really geared to make as much gasoline as possible, which is why there's been a lot of focus on this RFCC, which is, as you've mentioned, the main outlet for gasoline from the complex. It can upgrade residual fuel into high yields of gasoline and ideally deliver that to the domestic market. And as a result, when the RFCC started operating in September last year, that opened to a lot of fanfare.

The idea was that all of the fuel oil would then be upgraded into gasoline, and you could launch this new West African fuels hub. But in reality, things have been a little bit more volatile in the last year. So categorically, the refinery ownership said, "Fine, once we've started operating the RFCC, there won't be any fuel oil exported from the facility." As it started off ramping up in January last year, there were some early fuel oil exports because they were just trying to basically push whatever into the market that they were making. And then you saw yields shift later in the year. So now what's happened is we've seen a couple of RFCC outages start to creep in, which is what you might expect when you see these big facilities start up and try to stabilize. But what it's meant is that the markets had some extra fuel oil supply exported and pushed out into the global complex that you wouldn't necessarily have expected once you'd got the refinery working in the way that it had been designed.

So yeah, in reality, it means more length for the global market. For the meantime, as you mentioned, the latest RFCC outage was in September this year after some issues on and off over the last few months. So in reality, what happened was once the RFCC started running in September, there was a hiatus in these exports. Basically, nothing happened between September and January this year, and now we've started seeing them tick up again, and it's added this extra length. I'm sure we can touch later on what that might look like towards the end of the year. It's looking now like maybe they have to do some kind of full turnaround at the facility.

Because I should mention that when they have these RFCC-only issues, they can still run the whole complex, they can still run the CDU, they can run other secondary units, which means that you still get fuel oil, you still get jet gas oil, all the rest. Whereas if we see a bigger, longer-term maintenance that might be a few months, then you might see the entire facility shut down. It just runs off one crude distillation unit. So that would then turn things on their head again. But that's where we are today, and we can obviously move on into how that distorts fundamentals.

Gary Clark:

Okay, understood. I mean, obviously, it's to be expected, these teething problems with respect to ramping up a refinery of this size. But that said, there's more fuel oil in the market right now. So coming to you, Charlie, I know you track supply and demand of fuel oil in the European markets very closely. Where did the supply for Europe for fuel oil come from before the Dangote Refinery came online?

Charlie Wright:

It's mainly a mixture depending on which fuel oil grade it is. So very low sulfur fuel oil, which is VLSFO, mainly typically came from within Europe, whereas high sulfur fuel oil came externally. So mainly from Russia, it was mainly imported in. And obviously, this is a market that's massively integrated in terms of across the globe. So when something happens in Asia, it will naturally impact Europe. What Europe used to do quite a lot was export their surplus of very low sulfur fuel oil to Singapore. So that used to be quite a common arbitrage opportunity that was open for Northwest Europe into the Singapore market for bunkering purposes and for blending in that region. That's changed significantly since Dangote came online.

Gary Clark:

I see. And the type of fuel oil that the Dangote Refinery is producing when the RFCC is out, is that very low sulfur fuel oil or-

Charlie Wright:

It's a mixture of very low sulfur fuel oil, and also they produce quite a lot of feedstocks. So low sulfur straight-run and slurry, which can be used for blending into the bunkering market, into very low sulfur fuel oil. So while it's not a direct link to the fuel oil market, because it can be blended, it often has a lot of length into the global market.

Gary Clark:

I see.

Charlie Wright:

So while it's not directly producing fuel oil to be used in Northwest Europe or Singapore, it's increasing the amount of available product.

Gary Clark:

And so what are you seeing in the market right now, then, for these fuel oils?

Charlie Wright:

As of right now, what we've seen quite a lot of is feedstocks being exported into Singapore. And as a result, we've seen in Singapore, the cracks drop to a two-year low, markets moved into contango just because of how much length and supply is there. Obviously, that's all coming from Dangote. What that's done is it's shut the arbitrage from Northwest Europe to Singapore. So while the arbitrage is closed on paper, we're seeing both Northwest Europe, which Joseph will touch on in a little bit, and Singapore, we're seeing both the cracks and the structure just completely flatten and come off significantly.

Gary Clark:

I see. So you're describing to us here a very weak market for fuel as a result of one of the major factors being the RFCC outages that we're seeing at the Dangote Refinery. So you mentioned Asia there, Charlie, right? So that market weakened first because it takes a lot of supply from Europe, but now we're seeing knock-on effects with respect to weakness in the European fuel oil markets. So maybe Joseph, if you could...

Joseph Jaffe:

Yeah, for sure. As you touched on precisely, so we're seeing in Singapore this length emerge on the back of more feedstocks entering the market, resulting in more blending components and circulation and a longer Singapore market, which is having a direct impact on the status of this arbitrage opportunity from Europe to Singapore. And looking at a more regional and focusing on Northwest Europe and the Mediterranean markets, what we're really being exposed to as a market where this arbitrage was providing quite significant price support for very low sulfur in the region following the enforcement of the Mediterranean ECA zone, which came into effect on May 1st.

We've seen appetite for very low sulfur across the basin really come off. And as ship owners seek alternative fuels such as marine gas oil and high sulfur fuel oil, potentially blended, or a mid-sulfur fuel oil blended to that sulfur content of 0.1% sulfur to comply with these fresh regulations. So as a result, it's essentially led to significant uptick in alternative fuels and a decrease in demand for very low sulfur. And that's sort of what we're seeing today. And as Charlie mentioned, with the cracks coming off in Singapore and market structures shifting from backwardation into contango, we're also seeing that in Europe.

Gary Clark:

I see. So what's the price of VLSFO now in Europe relative to say a year ago? Have prices really collapsed substantially or even versus a month ago or...

Charlie Wright:

I'd say cracks now in Northwest Europe are around 1.5 to $2, whereas say two or three months ago they were significantly higher. I think we reached a peak of $8 at the end of June, beginning of July. So they've come off significantly. I think one thing to note is that high sulfur fuel oil has also collapsed during that time, just because of a lack of demand in the bunkering market, and generally just a surplus of material for high sulfur fuel oil. So there's a bit less of a bottom to support very low sulfur fuel oil. So while high fives, which is the difference between high sulfur fuel oil and very low sulfur fuel oil in the paper market, well, they stayed quite wide. We perhaps saw a narrowing to $30 a few months ago, and then now it's 60. They've stayed wide, but the cracks have massively come off on high sulfur. So the very low sulfur has followed suit when there's been less market fundamentals to support them.

Gary Clark:

I understand. Yeah, I mean, you're describing here a picture of not only you've got weaker demand in the Mediterranean for these very low sulfur fuel oils and high sulfur fuel oils as well, and then these RFCC outages are adding to supply in the region, and the arbitrage obviously to Asia not working is leading to that length within Europe. I mean, what's fascinating is how one new refinery in West Africa, the effects are being felt in the fuel oil market all the way through to Asia. So what are your trading sources telling you about the picture for fundamentals going forward?

Joseph Jaffe:

Yeah, so going forward for 0.5%, very low sulfur fuel oil, the outlook has been a very bearish picture with market participants, as I touched on earlier, seeking to almost shift consumption patterns away from this sulfur grade to alternatives to comply with these fresh regulations. And as Charlie mentioned, we've been seeing the cracks fall over $2 since the start of September and have fallen about $7 since the start of July. And this has been quite telling as to where appetite for this product is at the moment. Whether alternative arbitrage opportunities open up to the US, it's to be confirmed, or wait-and-see approach. But at the moment, it is quite a bearish outlook.

Gary Clark:

I see. And Kelly?

Kelly Norways:

I was just going to say it's probably worth trying to capture some of the volumes that we are seeing through our ship tracking data. Basically, what it seems to have been is something like 100,000 barrels a day of resids that's being exported when the RFCC is not operating. That's what we saw at a peak before it started running last year, and now again in August. So they're not inconsequential volumes that are coming out at the moment. And yeah, Singapore is a big export hub, and there's also a lot going to Malaysia, the UAE, sometimes the US, patches of cargoes that are heading to other African countries like Namibia and South Africa. I guess really the question is just how long these RFCC issues continue for or whether they can stabilize them and then you see all of come off again, which I guess is what the market's watching for quite closely.

Something else that's worth thinking about with the future of the refinery mentioned, that if they were to do a bigger turnaround, then you might see everything stop for a while. So far, the management hasn't confirmed any plans to do that, some kind of three-month maintenance or a larger turnaround. But what they have said is that they are planning to upgrade their capacity from the current 650,000 barrels a day to 700,000 barrels a day, which will require downtime to do that. So at some stage, whether it's stabilizing the refinery, whether it's doing maintenance, you will expect those exports to dry up. It's just a matter of when.

Gary Clark:

Well, look, it's been an absolutely fascinating discussion, and I think it just highlights, with the ramp-up of such a large refinery, it has impact not only on European markets but on global markets for both refined products and for residual fuels as well. It really is a complex picture going forward. But look, thank you, Charlie, Joseph, and Kelly, and thanks for listening. Keep up to date with Platts Live, the professional platform built exclusively for the energy industry. Have your say, and join the conversation at plattslive.com.