Homam Star

Asia Outlook: Fuel Oil To Consolidate, Naphtha Likely Firm [REPORT]

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February 11, 2012

SINGAPORE (Dow Jones)–The Asian fuel oil market is likely to consolidate with a bullish stance next week; traders say the product’s spreads look appealing after the recent correction.

However, a greater inflow of fuel oil from the West could weigh on the market as traders rush to take advantage of prevailing strong premiums, even though differentials have declined in recent days.

Traders have resorted to smaller, faster vessels to ship supplies to Asia and arrivals are due to swell in March, despite the recent selloff in the Singapore market creating unfavorable arbitrage economics.

Russia’s Lukoil chartered its second VLCC of the week on Friday, at $4.50 million, to ship barrels to Singapore. The Homam Star will load from Rotterdam Feb. 20.

But the steep prompt backwardation is likely to move down the curve as the region’s seasonal refinery maintenance begins, despite the heavy arbitrage inflows this month and next, traders said. Most of the factors underpinning demand are expected to persist for the next couple of months, they said.

South Sudan has completely stopped producing oil and may take months to restore full output, the nation’s oil minister said Friday. Sudan’s Dar Blend is a key feedstock for China’s teapot refiners, who may grow hungrier for fuel oil after the government raised retail fuel prices by around 3.5% this week.

China’s fuel oil deficit is also expected to expand as it buys more West African crude oil due to the disruption of the supply of Iranian crude because of a pricing disagreement.

Narrow light-heavy and sweet-sour differentials amid recovering naphtha cracks have prompted Asian refiners to buy more spot cargoes of light, sweet crude for March loading, which, along with the refinery maintenance, is likely to lower overall fuel oil output over the next three months.

Upgrades at refineries such as Essar Oil’s Vadinar plant and MRPL’s New Mangalore unit are likely to take a substantial amount of barrels out of the Singapore bunker pool over the course of the year.

Asian naphtha cracks are likely to be steady or a tad stronger next week, although the cracker maintenance season beginning in March in Japan, Taiwan and South Korea could start to weigh on sentiment.

While the market remains firmly balanced now, the shutdowns could weaken fundamentals, although supplies are also likely to fall because of refinery maintenance in much of Asia.

Gasoline cracks will also remain supported by market fundamentals in Asia, and strong product spreads in the U.S. and Europe.

The Asian gasoil market is likely to remain firm. Traders are eyeing opportunities to ship barrels out of the region because recent refinery shutdowns are expected to tighten supplies in the U.S. and Europe.

Jet fuel sentiment is likely to hedge on temperatures in North Asia as a prolonged winter in Japan could continue to support demand for kerosene.

-By Gurdeep Singh, Dow Jones Newswires

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