Singapore — Asian refiners are buying more light crude and trimming purchases of heavy oil, as they tweak production to meet rising demand for low-sulphur fuels in the shipping sector.
Asia’s demand for light, low sulphur crude grades, known as sweet crude, produced by countries such as the United States, the United Arab Emirates, Brazil and Nigeria has strengthened after the price gap between light and heavy crude narrowed this year amid record U.S. shale production and tighter availability of heavy oil.
“The traded crude slate is getting lighter and sweeter. At the same time, expansion of the refining system is geared towards heavier crude,” Vitol’s Global Head of Research Giovanni Serio said at the Asia Pacific Petroleum Conference (APPEC).
“It’s a real challenge that refineries are facing every day and (will face) for the next few years.”
Refiners globally have been building expensive secondary units that can further process the residual fuel oil left over from the initial refining of heavy oils into higher quality products such as gasoline and diesel. The global shift towards lower sulphur fuel for ships from January was supposed to lower heavy, high-sulphur crude prices and widen its price relative to light oils but that has not happened.
Instead, U.S. sanctions on Iran and Venezuela combined with production quotas set by the Organization of the Petroleum Exporting Countries have tightened heavy oil supply since the second quarter.
Saudi Arabia, the world’s largest oil exporter, has committed all of its Arab Heavy crude production to term customers and it has a 400,000 barrels per day refinery at Jizan starting up in the fourth quarter that will require more heavy oil supplies, a source familiar with the matter said.
Strong heavy crude prices have reduced the margins for secondary units, prompting refiners to trim output at these units and process more light oil to produce low-sulphur fuel oil or marine gasoil to meet International Maritime Organization (IMO) specifications from January, refining sources said.
To produce IMO-compliant fuels, some refiners have increased purchases of light crude in the fourth quarter, underpinning spot premiums for grades such as Abu Dhabi’s Murban crude, U.S. West Texas Intermediate (WTI) Midland and Brazilian Lula, according to several traders that participate in the market.
Japan’s third-largest refiner Cosmo Oil is processing more light crude to produce very low-sulphur fuel oil (VLSFO) although it will also buy more heavy crude for its delayed coker unit at Sakai after an expansion, said Mitsuyasu Kawaguchi, the general manager of its crude oil and tanker department.
“International supply of heavy crude is being decreased because of sanctions … so we see some challenges in how much heavy crude we’re going to term up and what’s the game plan for the light side,” he said.
South Korean refiners have also increased light crude imports from the United States to boost VLSFO supplies.
“We’re increasing the use of WTI and WTL (West Texas Light) to produce VLSFO,” said a South Korean refining source who declined to be identified because he is not authorised to speak to media.
“Using those grades is easier to produce VLSFO because we can make it without going through conversion units.”
State-owned refiner ChemChina has also increased its Murban crude purchases over the past two months, buying at least 2 million barrels per month, offsetting imports of comparative heavier grade Upper Zakum, said several traders that participate in the market.
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