As reported by the Arab News source late last month, the number of countries that are exporting refined oil products is threatening to affect export profitability. While there have been some refinery closures in the developed world in countries such as US, Britain, Germany, Canada, Japan and Australia, these closures have not kept pace with the decreased demand for oil in the developed world. In China, refinery production has outpaced domestic demand. As a result, China is now situated to export 400,000 tons of diesel this month. China currently has a number of expansion projects underway for 2014 and 2015 and thus their new position as an exporter appears to be in place for the long term. In addition there is also large-scale growth underway in Saudi Arabia. A new refinery at Jubail is only one of three new refineries underway. This joint-venture facility will produce 90,000 barrels of the fuel a day after it starts operating next quarter. There are new Middle Eastern refineries in the UAE, Kuwait, Qatar, Bahrain and Oman and Asian oil importers are also increasing their capacity. According to Reuters market analyst, Robert Campbell, “the likelihood is that these additional volumes of fuel will depress pricing once they hit the market.”
Middle East: Moving from Import to Self-Sufficiency
Expansion of oil refineries in the Middle East is the largest ever and is designed to decrease imports from India and Singapore. Saudi Arabia is currently the largest importer of gasoline in the Middle East. Their Massive expansions are anticipated to decrease fuel imports by 50% within the next year. In the UAE, the new Ruwais plant, which is set to open in 2014 is expected to provide total gasoline self-sufficiency. As published in Bloomberg, May 9, this $100 million expansion over the next seven years threatens serious consequences to refining margins within Asian markets. According to traders and analysts in a Bloomberg survey, Saudi Arabia will import 100,000 to 120,000 barrels of gasoline a day from June through August to ensure demand over the summer. The demand on oil during these months stems primarily from the running of air conditioners as temperatures reach 120 degrees Fahrenheit (49 degree Celsius). The new refineries will make it possible for Saudi Arabia to stop the import of fuel during high energy demand in the summer months. Saudi Arabia is also positioned to compete with Indian refiners in the sale of cleaner-burning diesel fuels in European markets. In 2012 Indian markets supplied 85,000 barrels a day of diesel to Saudi Arabia. Increased population growth of 4.2 % in Qatar and 1.5 % in Saudi Arabia may absorb some of the production. The largest increase in capacity within the Middle East is yet to come, planned for 2018.
Bunker Fuel Volatility: Speculation and Refining Priorities
Profits on low-sulfur transport fuel fell in Europe from $20 down to $15 a barrel in August. In Asia they fell even further from $20 down to $14 this week. According to Bank of America analysts, profits “will likely remain under pressure in 2013 and 2014.”
The price of marine bunker fuel (CS 380/IFO 380) has steadily risen over the past 20 years due to increases in global trade, crude oil demand and manufacturing. While bunker fuel prices have risen they also experience short-term volatility. Bunker fuel prices can be affected by speculation in the crude market, refining priorities and capacity constraints as well as difficulties in storing or hedging fuel. For instance, when crude oil prices are high, refiners tend to produce cleaner, higher-value distillates. This can negatively impact profits as refiners decrease production of bunker fuel. As one of the lowest-level diesel fuel distillates, it is thick and heavy and can create deposits in refinery pipes and equipment. Bunker fuel is also difficult to store and transport and is mainly stored at or near major ocean ports. Thus prices fluctuate greatly from port to port. The cost of fuel makes up about 60% of sailing costs and fuel price volatility can create a major challenge for container lines providing service to international ports. Other important operating costs include crew, repair and maintenance, marine insurance, stores, and administrative costs. The volatility of fuel prices create a destabilizing effect in particular on rates in long-term contract trades, where short-term rates eroded fuel costs recovery. In response a separate Bunker Charge was created to protect business income by allowing for fluctuations in fuel prices and adjusting fuel price to per container costs. These types of bunker charges have been in use since the late 1980’s and replace earlier practices that folded fuel costs into freight rates.
Source: Eve Green