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Oil Quarterly: European fuel oil market to remain tight as refinery upgrades come online

  • Author
  • Eleni Pittalis    Emma Kettley    Tamara Sleiman    Elza Turner
  • Editor
  • Maurice Geller
  • Commodity
  • Oil
  • Topic
  • IMO 2020

London — A tighter supply picture is dominating the outlook for the high sulfur fuel oil market in the fourth quarter of the year as Russian exports fall and refinery upgrades come online. This, along with the possibility of some winter demand for desalination from Saudi Arabia, has been reflected in a persistently strong backwardation across the 3.5% FOB Rotterdam barge curve.

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On the supply side, Russian fuel oil exports fell 23% year on year in August and 19% month on month to 2.318 million mt, according to data from the Central Dispatching Unit. The decline is largely attributable to refinery modernization in preparation for the IMO's 2020 marine sulfur cap, with many large refineries launching delayed cokers, while medium-sized and small independent plants have also been reducing their output, albeit mostly for financial reasons.

Refinery upgrades are also a theme in Northwest Europe, with ExxonMobil's 320,000 b/d Antwerp delayed coker expected to remove around 200,000 mt of RMG 380 CST fuel oil a month from the market from October.

High sulfur fuel oil often experiences a decline in demand and takes on a contango structure from November through to February, as market players begin to destock for year-end accounting purposes and power generation requirements from the Middle East decrease. With Saudi Arabia significantly increasing its desalination capacity this year however, demand for fuel oil from the Arab state could remain resilient through the winter.


After a relatively steady summer, the low sulfur fuel oil market will likely slow in the traditional manner moving into the winter, but October should remain supported by Mediterranean demand.

The market awaits the annual tender requirements from the Mediterranean power utilities, and refineries which consume LSFO for power generation purposes, as around half of the LSFO demand is met through annual tenders, including from EAC of Cyprus, Greece's Hellenic and PPC, and Turkey's Tupras.

PPC already expects to require around 900,000 mt of LSFO in 2019, only down by around 15,000 mt from 2018. Last winter, the LSFO market benefited from some additional non-EU demand from Brazil's Petrobras to fulfill a shortfall in requirements due to a drought, however it remains to be seen whether such a weather cycle will recur this year.


The IMO 2020 sulfur cap remains firmly at the forefront of European bunker market participants' minds moving towards the end of 2018. In the European market -- particularly in the bunkering hubs of Rotterdam and Gibraltar -- physical suppliers are awaiting clarification from major refineries in the area as to how much 3.5% sulfur fuel oil will be available to the bunker market.

Many refineries are in the process of adding cokers which will reduce high sulfur fuel oil output, which is a source of concern to physical suppliers who need to serve vessels with scrubbers, as well as the vessels looking for 0.5% sulfur fuel oil or marine gasoil.

In the meantime however, buyers and suppliers are not predicting any issues with availabilities or loading congestion in the Northwest European market moving towards the end of 2018, with the market expected to remain balanced.


The feedstocks market looks set to take a bearish turn after a mixed performance in Q3 as distillate and gasoline cracks in the US Gulf Coast, the biggest consumer of Vacuum Gasoil (VGO), have begun to decrease as a result of the end of driving season in North America.

Sources expect demand to continue its seasonal decline in Q4, with VGO struggling into the year-end as USGC refinery turnarounds leave excess cargoes in the market with no homes.

In addition, Russian refinery upgrades, such as New Stream's Mariisky refinery increasing its vacuum distillations unit capacity to 1 million mt/year from 476,000 mt/year, will lead to increased VGO exports, causing an imbalance in supply and demand fundamentals.

Meanwhile, low sulfur straight run traded briskly in Q3 and the trend was expected to continue moving into the fourth quarter. The feedstock was offered at competitive levels, compared with low sulfur VGO, as the fuel oil crack continued to weaken on the back of ICE Brent futures hitting near-four-year highs ahead of the start of Iranian sanctions in early November.


Russian domestic fuel oil prices retained their strength and unlike light products, which had been under constant monitoring by the authorities, exceeded the export netbacks throughout the quarter.

They were supported initially by healthy export flows and good demand for bunker fuel at the ports at a time when capacity was being switched to bitumen to meet demand for construction and road works.

In August, support started emerging also from buying for power generation as utilities started stocking for the winter heating season. Export flows diminished as domestic deliveries were prioritized.

During the last quarter of the year bitumen capacity will gradually be switched back to the production of fuel oil, which should add to supply, however this will be countered by the increased demand for heating.

--Eleni Pittalis,

--Emma Kettley,

--Tamara Sleiman,

--Elza Turner,

--Edited by Maurice Geller,