Stable fuel oil outlook, but refinery supply increases

Fuel oil dynamics have shifted dramatically in the past five years.

Declining apparent demand for 'dirty' residual fuel oil, as greener products take precedence, is occurring in tandem with declining production yields. 

Added to this is increasing complexity in terms of specification changes affecting shipping bunker fuel usage in the ECAs, 200 miles out from the coastlines surrounding North America and the US Caribbean, the North Sea and the Baltic. 

Secondary refining units, such as fluid catalytic crackers (FCCs) are increasingly being used to break down fuel oil into more lucrative lighter products, thereby minimising fuel oil output. 

We understand  that c.15 million tonnes (mt) of new coking capacity will be commissioned between 2014 and 2016.

We have analysed global container volume data pertinent to the ECAs and focused on import and export trade via container ships.

The dominant routes are to and from Asia, Europe and North America.

The low-sulphur fuel oil that has to be used when in the ECAs is a fraction of the amount of fuel used for the entire voyage. 

The greatest impact will therefore be on shipping lines within Europe; however, these account for just 5% of total global container volumes.

Standard Chartered notes...

• We believe Europe will ultimately be self-sufficient in terms of supply of the specific fuel type required.
  
  
• We expect increased low-sulphur marine gasoil (LSMGO) purchases from Singapore as shipping operators stock up ahead of their voyages to the ECAs.
  
  
• Global shipping activity continues to grow, albeit slowly, and we remain optimistic that this will continue in the medium to long term, with growth from Asia at the fore.
  
  
• We expect shipping activity to pick up in this period of lower fuel oil costs and expect 2.5% growth in global container shipping volumes.
  
  
•  Total cargo handled by China's major ports increased by 6% in 2014, and by 4% y/y in January 2015.
  
  
• We expect increased shipping activity given that fuel oil or bunker fuel accounts for up to 70% of total operational costs for some shipping companies and operators.