Singapore Fuel Oil Traders Optimistic Over China's Product Price Hike

Fuel oil traders are bullish about the impact of China's recent gasoline and gasoil price hike on demand for straight-run fuel oil in the Asian giant, trading sources said this week.

China hiked the domestic price of gasoline and gasoil by Yuan 300 ($47.60)/mt from Wednesday.

Chinese fuel oil demand, especially for straight run fuel oil, is considered a major swing factor for the residual market in Asia, and strong demand from the country is known to bolster the Asian fuel oil sentiment.

"The Chinese price hike will certainly help, as will the fall in the fuel oil crack in recent days," one trader said.

However, others believe that the recent price increase was insufficient to spur continued straight-run fuel oil buying into April as spikes in crude prices in the past week could damper the buying mood by the Chinese.

"[The HSFO] outright price on fuel has gone even higher than the rise in Chinese [gasoil and gasoline] domestic prices, plus Chinese fuel oil inventory is full right now. Buying is very slow there," warned another trader.

Meanwhile, in Shandong, where independent refineries are mostly based, the retail price of gasoil is capped at Yuan 8,495/mt, while for 90 RON gasoline it is Yuan 9,345/mt. This means the wholesale price for gasoil and gasoline could be up to Yuan 8,195/mt and Yuan 9,045/mt, respectively, based on a formula that a gap of Yuan 300/mt should be guaranteed between the retail and the wholesale price.

The price hike could encourage independent refineries to lift their oil product output by increasing run rates, traders said, as refining margins seemed positive. This in turn could encourage them to buy more imported fuel oil, the traders added.

MARGINS REMAIN THE KEY FACTOR FOR STRAIGHT RUN IMPORTS

On Thursday, the import price for Russian straight run fuel oil M100 -- a common refining feedstock used by Chinese independent refiners -- was at a $87-88/mt premium to the Mean of Platts Singapore 180 CST high sulfur fuel oil assessment on a CFR basis into China. And the Singapore FOB 180 CST HSFO was assessed at $737.42/mt, up $10.02/mt from Wednesday's levels.

According to Platts estimates, the cost of procuring M100 at the current HSFO 180 CST price levels is almost Yuan 7,060 /mt ($1120.05/mt) after taking into account a 1% import tax, a Yuan 812/mt consumption tax, 17% value added tax and Yuan 40/mt license and inspection fees on the imports.

However, independent refineries in China do not normally process M100 alone, but a blend between M100 and crude oil or other straight-run fuel oil.

According to one source, at the current prices level, refining margins using straight run fuel oil together with crude oil and other fuel oil as feedstock were marginally profitable, a refiner said.

SINGAPORE FUEL OIL WEIGHED DOWN BY HEAVIER WESTERN INFLOWS

Separately, the residual oil sentiment in Singapore -- the world's largest -- bunker port has floundered in recent days, as expectations of heavier Western arbitrage flows into the city-state could dampen the mood next month.

Western arbitrage fuel inflows into Singapore were seen at around 4 million-4.5 million mt for February, while March arrivals were at around 3.8 million-4.5 million mt.

"I have heard the volumes being talked at more than 7 million mt for February and March," a third Singapore-based trader said.

Reflective of the bearish market, the February versus March 180 CST HSFO swap spread peaked at a high of $16.80/mt on January 27, 2012, and narrowed to as low as $6.50/mt February 3 2012 for the prompt month-second month spread.

FUEL OIL DEMAND SUPPORTED BY SLOWER IRANIAN AND SUDANESE CRUDE OIL

A Deutsche Bank report out earlier this month noted that China was the largest buyer of oil from Sudan and South Sudan, which separated in July.

US government data shows that China purchased two-thirds of the Sudan's combined exports, which supplied 5% of China's total oil import requirements.

Prior to South Sudan's independence, China National Petroleum Corporation was the biggest producer of crude from both sides of what is now the border with Sudan.

South Sudan suspended oil production at the end of January during a bitter dispute with Khartoum over pipeline tariffs and fees for using export facilities. Khartoum has demanded as much as $36/barrel in such fees, which Juba has balked at paying.

On the Iran front, Tehran has made repeated threats to close the Strait of Hormuz at the mouth of the Gulf if its oil exports are embargoed. And the European Union is to implement a ban on Iranian crude imports by its members in July.

"Production of fuel oil [too] is expected to be limited in Q1 as less crude is expected to be imported from Iran and Sudan," said a Shandong-based refiner. "Buying more West African crude grades to compensate for this, yield of fuel oil from refining that grades would be less."

In 2011, China bought 12.99 million mt or about 260,878 b/d of crude from Sudan, customs data showed. And, for all of 2011, China imported 27.76 million mt of Iranian crude, or 557,413 b/d, accounting for nearly 11% of their total imports.