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Cold spell drives oil resurgence in Asia's power sector

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Listen: Cold spell drives oil resurgence in Asia's power sector

The last few weeks saw temperatures in many parts of North Asia drop to record lows, and energy prices hit record highs. Platts JKM, the benchmark for Asian spot LNG prices, surged to $32.50/MMBtu, the highest since it was launched in early 2009. LNG freight rates hit unprecedented levels of nearly $300,000/day, trucked LNG in China rose to around $28/MMBtu, Japan's spot electricity prices hit 220 Yen/kWh, and the Platts Northeast Asian Thermal coal price hit $80/mt.

The ripple effect was felt across a variety of power generation fuels and across the whole region as supply chains were disrupted. Utilities found themselves having to shift back to fuels that have been becoming rather obsolete in the region's power mix. S&P Global Platts Senior Analyst Andre Lambine, Senior Editor Takeo Kumagai, and Managing Editor Rajesh Nair join Content Lead Eric Yep to delve deep in to the latest in Asia's oil and power sectors.

Also available on: Spotify and Apple Podcasts

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Cold spell drives oil resurgence in Asia's power sector

ERIC YEP: Temperatures in many parts of North Asia dropped to record lows this winter. This meant higher demand for heating fuels, power shortages, and emergency fuel procurement by governments and utilities. Several energy benchmarks, including the Platts JKM benchmark for Asian spot LNG, hit record levels.

The ripple effect was felt across a variety of power generation fuels and across the whole region as supply chains were disrupted. This meant that utilities had to shift to a fuel that has been becoming rather obsolete in the power sector in many countries, fuel oil and even direct burning of crude oil. The worst of the winter seasons likely over but utilities, fuel importers, and government regulators are still assessing the aftermath of the energy crisis.

Hello and welcome to the S&P Global Platts Oil Market Podcast - Asia edition. I'm Eric Yep, content lead for generation fuels in Asia. And today I'm joined by Platts experts to examine the recent surge in Asia's energy demand and its impact on oil. So to discuss in more detail, we have Andre Lambine, senior analyst with S&P Global Data Analytics, Takeo Kumagai, senior editor with the oil news team, and Rajesh Nair, managing editor for Asia residual fuels. Thanks for joining this podcast, gentlemen.

So Andre, let's start with you. Could you give us a sense of how the power situation changed in Asia? And what led to the energy shortages in the region?

(01:33) ANDRE LAMBINE: Yeah. Thank you, Eric. Yes, there's a number of factors that contributed to the situation.

So first of all, like you mentioned, it got cold, like really cold, in Northeast Asia, so the demand for heating and electricity increased. So all countries including China, Japan and South Korea, they needed more thermal fuels than earlier expected. This was especially important for demand for LNG, which fuels a large portion of the power markets in Japan and South Korea, while in China, it actually tends to go more into industry. But the higher regional demand for LNG imports came at a time when there were supply disruptions in the global LNG market in places like Qatar and Australia. And there were also shipping constraints through the Panama Canal impacting LNG produced in America. It was also cold in other places such as Europe, so demand was higher also there.

So all these caused the Asian spot price of LNG to reach new all time highs. As the Asian markets struggled to obtain enough LNG, the higher demand for electricity also filtered through to the coal and oil markets. And what worsened the situation this winter was somewhat lower than normal inventories, which made companies rely on spot buying to a perhaps greater extent than normal.

(02:48) ERIC YEP: Could you take us through how oil fits into the power mix in Asia? And what were the reasons that we saw something like gas-to-oil switching taking place?

(03:00) ANDRE LAMBINE: Great questions. Oil is a relatively small part of the power mix in most Asian countries. For places in Northeast Asia like Japan, South Korea and Taiwan, it is usually around 1% or 2% of the power mix; while it is higher in parts of South Asia with about 3% for Pakistan and up to 15% for Bangladesh. However, typically, even if oil is not a large percentage of the power mix, it's an important part of the overall picture. Often oil is relatively expensive for use in power generation so it is used to help cover peak demand periods and is also used in places without good grid connectivity such as remote islands.

Now, gas-to-oil switching is taking place because spot LNG has become more expensive than fuel oil and other oil products that can be used for power generation. Most LNG is imported on long term contracts, but buyers tend to top up with some additional spot LNG when needed. But not all LNG importing countries can switch from gas to oil-fired power generation because they do not have the sufficient unused oil-fired power plant capacity.

So for example, South Korea only has about 2 GW of oil capacity, and some of that is usually already in use during winter so the upside is limited. However, many other countries have available oil-fired power plant capacities such as Japan and several countries in both ASEAN and South Asia. And there perhaps especially interesting is Bangladesh and Pakistan because the timing of the situation comes at a time or the year when these countries typically see lower power demands. This is due to lower need for cooling. So there is quite a lot of unused oil-fired power plant capacity available.

(04:46) ERIC YEP: Hold that thought on Pakistan and Bangladesh. We will get back to you on that shortly. Let's go over to our Tokyo correspondent Takeo Kumagai, who is right in the thick of things in the middle of winter. And I hope Takeo that you you're not snowed in right now. But can you take us through Japan's power demand and how it has resulted in fuel switching towards oil? And how has the situation played out on your end?

(05:14) TAKEO KUMAGAI: Sure, Eric-san. It's been a cold winter here, and we have seen an uptick in crude and fuel oil demand in Japan as some local power utilities rush to procure more oil to meet the upsurge in power demand from severe cold spells.

Japanese refiners did respond to an emergency request from the power utilities to supply more direct burning crude and fuel oil in January, according to the head of Petroleum Association with Japan on January 21. Tsutomu Sugimori, however, said the refiners do not plan to increase their direct burning crude or fuel oil supply in February and March, during when the demand will still be in the midst of the winter demand season.

Sugimori's remarks underlined Japanese refiners' difficulty to increase their fuel oil output at a time when they face strong kerosene demand for heating, which is also as a result of cold spells. And there is a shortage of coastal vessels for fuel transport in Japan, after seeing lackluster oil demand for power in recent years.

Japan's largest refiner ENEOS also told us recently that it has seen its fuel oil demand far exceeding the planned supply volumes and the company would have to prioritize supplying to power utilities holding supply contracts because of supply constraints and tight vessel availabilities.

Japan's immediate power demand, however, peaked on January 8, and electricity demand in the first half of January jumped by about 10% from a year ago, according to the Ministry of Economy, Trade and Industry.

In line with the easing of power demand, Japan's oil-fired power plant run rates fell to around 25% as of January 17, down from around 64% on January 12, according to METI, after having peaked at just about 88% on January 8.

(07:30) ERIC YEP: Very interesting how the demand situation is shaping up over there. Isn't it true that Japanese power utilities have been at the forefront of dialing back on oil-fired capacity per se over the last few years? Do you see the utilities procuring more crude and fuel oil in the coming weeks as well?

(07:52) TAKEO KUMAGAI: Japanese power utilities have been mothballing their oil-fired capacities as they have shifted to gas-fired power generation in recent years. Despite the increased demand for power, Japan's JERA and Kyushu Electric, for example, did not have any immediate plans to restart the oil-fired units from their complete long-term planned shutdowns. However, we are hearing that some of Japanese by utilities such as Chugoku Electric and Shikoku Eelectric are working to procure more fuel oil from Japan and abroad, while Kansai Electric is working to procure crude oil from abroad, in addition to its domestic fuel oil procurements.

Japanese power utilities used to take heavy sweet Indonesian crude, such as Minas, Cinta, and Dury for power generation.

We heard that there has been a sharp increase in sport heavy sweet crude purchase inquiries from Japanese power utilities around Southeast Asia recently. However, we also heard that Japanese utilities will likely struggle to find any heavy sweet crude cargoes available for second half of January shipments in Southeast Asia. And we're better off for looking for fuel oil cargoes from Singapore for prompt imports.

Now the focus is about how much more fuel and crude oil will be procured by Japanese by utilities by March in order to meet the winter demand.

(09:34) ERIC YEP: Thank you. So we hope to be on top of the situation as it develops over the next few weeks and wishing you warm weather over there very soon.

Let's move over to Rajesh, our resident guru on fuel oil markets. Rajesh, can you take us through how the increase in power demand has impacted fuel oil markets? And is there enough fuel oil available in the system from refiners and traders and storage to meet this increase in winter demand?

(10:05) RAJESH NAIR: Hi Eric, for sure. Not so much a guru though. But first of all, the start of the year has traditionally always been good from a demand perspective for the Asian fuel oil markets, in that typically both buyers and sellers are usually looking to pile on product after destocking for the financial year end in December.

Now incremental demand for low sulfur material from the utility sector, especially for markets that have traditionally relied instead on cleaner burning fuels like LNG, has prompted LSFO suppliers in Singapore, especially, to sit up and plan balances in January in a way that they haven't had to for most of last year when availability was ample.

Incremental demand has in fact not only been limited to low sulfur fuel oil, but also for medium to high sulfur fuel oil from regional markets like Pakistan, Bangladesh, Sri Lanka, Philippines, and for this time of the year, also from the Middle East, especially Kuwait, as the state-owned KPC's Mina Abdullah refinery, which normally supplies product to meet domestic demand undergoes upgradation works.

This so-called double whammy of demand from the regional utility market and from sellers looking to restock after running down inventories in December has somewhat tilted the demand-supply balances.

Market sources estimate Western arbitrage fuel oil volume of just over 2 million metric tons to arrive in Singapore for January, down about 500,000 to 600,000 metric tons from what we saw coming in for December. No surprise then that Singapore's commercial onshore residue stocks have edged down for two consecutive weeks to 22 million barrels in the week ended January 20. And according to traders, stock held on floaters off Singapore waters is also being drawn down.

So the overall market sentiment is bullish. No doubt, reflecting this sentiment, the Singapore Marine Fuels 0.5% Sulfur cargo markets premium to the Mean of Platts Singapore Marine Fuels 0.5% Sulfur assessment has hit a near 11-month high of $4.7/mt on January 21.

Also the market structure, which is generally an indication of market sentiment, in the case of Singapore Marine Fuel 0.5% Sulfur swaps curve, the prompt-month market structure is currently trading at a near one-year high. So that sort of explains the overarching upbeat sentiment that's in the market at the moment, Eric.

(12:41) ERIC YEP: Thanks, Rajesh. Can I check with you how other consumers of fuel oil are coping with the situation especially the marine and bunker fuel market here in Singapore and also other parts of Asia that rely very heavily on fuel oil for marine fuel?

(13:02) RAJESH NAIR: Yeah of course, Eric. As I mentioned just now, January has witnessed a double whammy of sorts in terms of demand. Typically it's at the start of the year that you know, people would start looking at restocking and that's not only on the supply side, it is the case for the buyers as well. And this also coincided with the cold snap, which led countries like Japan, which hasn't traditionally relied on oil for a number of years now, to start looking at oil to meet its utility demand.

Now, this is also coinciding with demand for bunkering. Let me explain. The mainstay demand center for fuel oil is the marine fuel market and will continue to be that. And as I said, the beginning of the year is traditionally good in terms of demand. We have seen steady demand from the end-user marine fuels market in January. In terms of the spot market demand though, on the whole so far this month, the demand has not been particularly fantastic and that's essentially on account of a surge in the flat price, which, as we speak, is at almost a one-year high. But that said, demand is still said to be robust, especially from buyers that have inked contracts for January supply.

Now, aside of that, even for bunker markets from within the region, we have seen steady demand for product to be shipped out of Singapore to meet regional bunkering demand, especially South Korea, for instance, which is usually a balanced market, if not long, in terms of their domestic bunker demand. At least two out of the four refiners, as we know it, have been importing fuel oil from Singapore to meet their domestic bunker demand and even more so, because the refiners had cut run rates owing to poor middle distillate margins.

We are also seeing a steady demand to supply product to bunker markets, like Hong Kong and also high sulfur fuel oil into China. So overall, the market sentiment is that of optimism. A surge in flat price, however, has meant that some of the sellers have been able to make determined offers in a bid to attract buying interest within the spot market itself. This has in turn led spot market differentials for Singapore low sulfur marine fuel to be rather range-bound, trading in the low to mid teen levels so far this month. But that said, looking forward, what we see is that the Singapore ex-wharf contracts for Marine Fuel 0.5% bunker supply for February-loading is currently being discussed at a premium of anywhere between $5 to $6/mt, up from around $2, $2.50 at which these contracts were inked for January supply. So yeah, on the end-user side, too the market sentiment looks generally upbeat.

(15:52) ERIC YEP: Great overview, Rajesh. Thanks a lot.

Let's sail over to South Asia. We can't fly in the current pandemic.

Andre, take us through some of the fuel switching market fundamentals in South Asia and how is the situation playing out in Bangladesh and Pakistan? How do you see the power situation there shaping up?

(16:14) ANDRE LAMBINE: So you know, to me, Bangladesh is a key lead indicator for gas-to-oil switching in Asia. And that's due to really good data availability, and also the composition of the power mix and a power plant capacities that leave room for oil.

So what we have seen so far in January is that power demand has been higher. But the grid-connected generation of gas-fired power plants actually fell by about 1.5 GW on average year on year. At the same time, oil-fired power generation increased with the same amount so oil increased on the expense of gas.

Bangladesh has had problems obtaining bids for recent spot tender for LNG and is likely short on gas, and we assume Pakistan is in a similar situation. So all these countries can do switching.

Now oil-fired power plant capacity in Bangladesh is about 7 GW, and Pakistan has around 8 GW. While we do not think these countries will fully utilize the existing oil capacity, we assume switching to oil-fire power generation could reach a combined 4 GW for January, and this could go even higher in February.

Existing long-term supply contracts for LNG usually come with little flexibility, so this could limit the switching. Some switching could also take place in March, but this situation is not as clear cut as for January and February. It will come down to power plant efficiencies and the margin will just not be as high as what we see for February.

In general, power demand is likely to stay around normal for this time of year as the weather forecast has come down to normal levels for the next couple of weeks.

(17:52) ERIC YEP: Thanks, Andre.

Rajesh can I dial back to you know about this whole theme of oil-fired power generation capacity and the way it is being phased out over the last few years? Even here in Singapore we don't really burn oil for power generation anymore, although it's still happening in a lot of countries. Do you see the recent events this winter forcing a rethink among either refiners or fuel suppliers on fuel switching? And does fuel oil still have a future in Asia's power mix?

(18:26) RAJESH NAIR: That's a very interesting question. One thing that the market might sort of want to do going forward, especially taking into consideration what is currently going on at the moment, is to perhaps better plan their balances going forward, especially when we are talking about going into peak winter season demand. As you rightly said, especially countries like Japan, which used to back in the day be a fair demand center for low sulfur fuel oil has completely switched to cleaner burning fuels.

This year around it sort of was a bit of a jolt, so to speak, in terms of demand that arose from markets like Japan, and even for that matter, Korea, which, you know, we've seen at least three cargoes if not more, for utilities going into Korea so far this year.

So this is all essentially incremental demand that we saw and very unlike what we would see, especially this part of the year. But that said, to answer your question, in terms of the fuel oil as a burning fuel within the burning mix, and as Andre sort of pointed, there is more than a handful of countries within this region which needs to up its power generation capacity. And as that capacity goes up, even as there is more reliance on cleaner burning fuels, we do see an opportunity for fuel oil to find that incremental demand going forward. And as such, even now when we talk about fuel oil demand into the utilities market, we're seeing pockets of demand which depending on the demand supply balances then can be rather strong positive for the market.

Talking about markets like Pakistan and Bangladesh, you know, from where we've seen fairly steady demand for fuel oil, even Sri Lanka or even Philippines, the one giant demand center that I have so far missed out on talking about is, of course Saudi. Peak summer season utility demand for Saudi is estimated to be a little over 3 million mt a month and that is significant. And that is only the utility demand that we're talking about. Then, of course, we also have demand for industrial applications. Again, if you're talking about Saudi Arabia, there is a fair amount of fuel oil that goes into the desalination plants.

So it doesn't look like at all that fuel oil as a burning fuel is going to be completely phased out anytime in the near or foreseeable future, Eric.

(20:48) ERIC YEP: That was a fantastic overview, Rajesh. Thank you very much.

I guess this whole situation highlights how critical the whole energy transition conversation in Asia is at the moment and how carefully both governments and companies would have to evaluate their dependence on individual fuels.

It also highlights how the conversation around carbon emissions from fossil fuel burning can evolve over the next few years, especially if countries have to consider critical demand seasons, like winter, for instance.

That is all that we have for today's podcast. Thank you very much for joining us. And thank you very much, Andre, Takeo and Rajesh for your insights.