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High gas prices weigh on fuel oil availability as refiners' operating costs rise


European gas values at historic highs

Refiners, utilities turn to fuel oil

Tight supply drive record high bunker prices

  • Author
  • Staff
  • Editor
  • Manish Parashar
  • Commodity
  • Electric Power Energy Transition LNG Natural Gas Oil Shipping
  • Topic
  • Europe Energy Price Crisis

High gas prices have been raising costs for the production of very low sulfur fuel oil -- the key marine fuel post the International Maritime Organization's global low sulfur mandate -- and curbing output of the residual fuel.

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Refineries that run on gas are facing surging prices for power and this has been forcing them to trim some operations, including production of 0.5% sulfur fuel oil.

"High natural gas prices have pushed the cost of desulfurization extremely high, which removes an incentive for refiners to produce lower sulfur molecules," a fuel oil trader told S&P Global Platts.

European gas prices remain at historic highs on continued winter supply concerns given curtailed Russian deliveries and relatively low storage stocks.

The TTF day-ahead price hit an all-time high of Eur182.78/MWh on Dec. 21, 2021, an increase of 985% year on year, according to Platts price assessments. Though prices have cooled since, they still remain near historic highs.

The TTF day-ahead contract was assessed Jan. 18 at Eur79.20/MWh, still a year-on-year increase of 290%. According to the forward curve, prices are set to remain high in the coming months, with the TTF contract for March assessed at Eur78.25/MWh.

The higher power costs are resulting in a noticeable premium to price levels. "This has raised operating costs by roughly $3-$5/b for those refineries fully exposed to purchased spot gas [for refinery fuel and hydrogen production]," S&P Global Platts Analytics said Jan 14. "Electricity costs are also higher in many of those markets."

The forward curve shows prices falling slightly from April, with the second-quarter contract assessed at Eur64.15/MWh on Jan. 18, but that is still three times higher than the same contract a year ago, Platts data showed.

The effect is most pronounced in Europe, where some refineries are particularly exposed to the spot gas market for their refinery fuel. In Asia, contracts are more spot oriented, Platts Analytics said.

Fuel for refineries

High gas prices are also causing more demand for fuel oil as a feedstock, which means refineries are not just producing less VLSFO but also competing with the bunker market for it and for 3.5% sulfur fuel oil, or high sulfur fuel oil.

Those refiners and utility providers that have the flexibility to switch to alternative fuels are doing so.

In recent months, high natural gas prices have turned power generators to substitute away from natural gas to oil -- primarily low sulfur fuel oil, low sulfur burning crude, and some HSFO -- and refiners to burn more LPG and fuel oil, Platts Analytics said.

In countries where fuel oil can be used more extensively for power generation -- a few European locations and Singapore -- margins are now quite good, Platts Analytics said.

Squeezing the bunker market

The result of this tight supply and increased demand is that prices for bunker fuel in Rotterdam, the Netherlands, are reaching record highs.

VLSFO prices in Rotterdam have hit their highest level since the Platts assessment was launched in July 2019. Marine Fuel 0.5%S was assessed at $651/mt on Jan. 18, Platts data showed. The previous record high for VLSFO in Rotterdam was $608/mt on Oct. 25, 2021.

"The market is continuing to go up at the moment. We have seen tightness across all grades of fuel oil in Rotterdam, which we expect to continue until the end of January at the earliest," said one Rotterdam-based supplier.

Asia fuel oil market tight

The Asian fuel oil market, which typically sees 2 million-3 million mt/month of cargo inflows from the West, has been receiving a relatively low amount of inflows since the second half of last year, partly due to strong demand from power utilities in Europe, fuel oil traders said. Power utilities in Europe consumed more fuel oil with sulfur content of about 1%, which reduced volumes to go to Asia, the traders said.

In addition, Asian power companies raised fuel oil buying amid high LNG prices in fourth-quarter 2021, tightening Asian 0.5%S marine fuel further. The Platts JKM, the benchmark price for spot LNG in Asia, was assessed at $23.113/MMBtu on Jan. 24, compared with Singapore Marine Fuel 0.5%S at $16.07/MMBtu, Platts data showed. Asian 0.5%S marine fuel supply has remained tight, as the February-March spread was assessed still at a double-digit backwardation of $14.25/mt on Jan. 24, Platts data showed.

LNG prices had a significant turnaround in 2021 versus 2020, as JKM averaged $15.03/MMBtu during the year, with the daily physical assessment hitting an all-time high of $56.33/MMBtu on Oct. 6, 2021, as both Asia and Europe were competing for supplies ahead of the start of winter. Platts Analytics expects JKM to average more than $31/MMBtu for deliveries in Q1 due to the threat of cold temperatures and a tight global gas market, especially in Europe where storage inventories remain well below historic norms.