Higher crude prices and a decline in fuel oil exports from Russia are pushing up the value of fuel oil C, a type of heavy oil, on the Singaporean market.

The benchmark price of fuel oil C in the city-state was hovering around $340 per ton in early January, up 30% from recent lows in November and the highest level in 19 months. The increase has triggered a rise in the prices of fuel oil C-type products such as marine and thermal power oil.

Japanese shipping company Nippon Yusen estimated in an earnings report issued in October that an increase of $10 per ton in fuel oil prices would shave 1.2 billion yen ($10.4 million) off its annual earnings. So higher fuel prices are bound to squeeze the finances of shipping lines already struggling with a prolonged industry slump.

The price uptrend partially reflects OPEC members’ agreed-upon oil production cut. But one trader explained that Russian fuel oil accounts for 20-30% of the trading in Singapore — a major hub for petroleum products — and a shift in the Russian supply is swaying the market.

Fuel oil offers narrower price margins over crude oil than other products such as gasoline, gas oil and jet fuel. For this reason, “petroleum companies in Russia have been expanding the refining capacities of their oil refineries,” said Takayuki Nogami, chief economist at Japan Oil, Gas and Metals National Corp., or Jogmec. This has resulted in a decrease in the supply of fuel oil C and an increase in production of gasoline, gas oil and other wider-margin fuels.

Russia has also been raising its export duties on fuel oil in stages since 2014. As this further reduces the margin, Russian producers are more inclined to supply fuel oil for domestic consumption rather than export it. And with Moscow having raised the export tariff again in January, the supply of Russian fuel oil is unlikely to revert to previous levels.

Imports from Europe and Africa can partly offset the reduction. But higher marine transport costs mean fuel oil C prices could easily rise in Singapore.

Back in early January 2016, fuel oil C was trading at $142 a ton, about 40% of the current level. “We are trying to conserve fuel by slowing down our ships,” said an official at a major shipping company. “We also refuel ships at cheaper refueling locations, depending on the situation.”

While the tighter supply has improved the margin on fuel oil, it remains narrow compared with gasoline and gas oil. And as refining infrastructure expands and modernizes worldwide, fuel oil supply is on a downward trajectory worldwide, not just in Russia. For shipping companies and the electric power industry, this likely means the end of the golden period of cheap fuel.

Source: Nikkei