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FEATURE: HSFO cracks at pre-IMO 2020 levels on sour crude shortage, US refiner demand

Highlights

Global HSFO prices at mid-2019 levels despite no bunker demand

HSFO use as coker feedstock now the major demand driver in US

Demand increases in recent months as sour crude prices rise

Houston — Global high-sulfur fuel oil cracks have rebounded to 2019 levels in June despite demand destruction from the retail bunker fuel sector, as a decline in sour crude production has encouraged US refiners to buy HSFO as a refinery feedstock.

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The 3.5% FOB Rotterdam barge crack spread has been assessed at an average discount of $6.17/b in June 2020, the narrowest discount of the year, S&P Global Platts data showed. Spreads in Rotterdam have moved to a narrower discount on an outright basis compared with June 2019, which had an average discount of $6.44/b.

Similar trends have followed in the US, where US Gulf Coast HSFO has been assessed at an average discount of around $7.84/b to Brent.

It marks a stunning and rapid turnaround of the prospects of HSFO, a market that saw its main use as a bunker fuel disappear at the end of 2019 due to IMO 2020 sulfur regulations.

The bunker market shift towards 0.5%S marine fuel reached its stride in November 2019, which coincided with weakening HSFO crack spreads. USGC HSFO was assessed at a discount of $29.19/b to Brent on November 13, and 3.5% FOB Rotterdam at a discount of $36.13/b to Brent on November 27, both all-time lows.

US refiner demand

HSFO's record discounts to crude globally helped bring about a demand recovery, led by US refiner buying. The extreme discount of HSFO relative to crude meant that the product could work as a more cost-efficient option to run in a refinery as a feedstock. While HSFO is not as profitable as crude, complex refineries in the USGC shift away from sour crude to HSFO if the discounts become wide enough to offset the decreased efficiency and output.

The US imported 53.98 million barrels of HSFO from November 2019 through June 2020, Kpler data showed. This was a notable increase from November 2018 through June 2019, which saw a total of 28.98 million barrels.

A majority of this additional flow of fuel oil to the US came from Russia. The US imported 24.2 million barrels of HSFO from November 2019 through June 2020 from Russia, or around 58% of its total HSFO imports, Kpler data showed.

Much of this fuel oil before IMO 2020 ended up in Europe to be used as a blending component for bunker blending. Due to less coking capacity in Europe than in the USGC, the oil demand shifted to the US.

Mexico also increased its fuel oil exports to the US due to refiner demand. The country exported 12.82 million barrels of HSFO to the US from November 2019 through June 2020, nearly twice as much as the 6.97 million barrels exported in the same time period a year before.

HSFO demand steady even as cracks strengthen

HSFO refining cracks have remained at single-digit discounts to crude through the coronavirus pandemic and the subsequent decline in refinery run rates, which caused US imports to decline in April.

Imports of HSFO picked back up in May following a global decline in sour crude production, which left refiners struggling to find high-sulfur material, sources said.

US imports of HSFO were just 3.15 million barrels in April before bouncing back to 10.35 million barrels in May.

Sources said a major factor in a return of US demand came from declining global sour crude production and a subsequent rise in prices.

Russian Urals loadings have fallen from 2.11 million b/d in April to just 776,642 b/d in July, the lowest since the first quarter of 2012, according to the provisional loading program.

In addition, the Dubai crude swap structure flipped to backwardation in the front of the curve on June 17 on bullish demand sentiment, particularly from Asia.

Since Mars was assessed at its steepest discount of $8/b to WTI on March 31, Mars differentials have averaged a premium of $2.10/b, Platts data showed.

This boost in sour crude prices has provided additional support for HSFO prices, and has set a higher floor in the market.

Sources in the US said expectations of seasonal demand pull from Saudi Arabia in the summer for power generation have also led to bullish sentiment, which has been seen in the prompt part of paper curves.

The spread between the July and December 3.5% FOB Rotterdam barge swaps was assessed at a contango of $22/mt on May 1, and has since flipped to a backwardation of $3.75/mt as of June 26.