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Asia's looming fuel oil supply crunch

Higher demand and declining imports will tighten supplies

Warmer weather across the region which will have boosted demand from the power sector, and lower imports, will tighten supply between now and the beginning of next year. It means Asia is heading towards a fuel oil supply crunch.

Over the first half of 2016 fuel oil supply to Asia-Pacific was more than 1m barrels a day less than the 2.6m-2.7m b/d the region consumed, according to Energy Aspects, a consultancy. The shortfall is likely to last until the first quarter of 2017.

South Korea will be particularly badly affected as the country's fuel oil supply deficit averages 120,000 b/d in Q4 and Q1 2017, according to Energy Aspects. That's up from a supply shortfall of just 90,000 b/d in Q2 this year. This is because of an anticipated surge in demand, which will reach 315,000 b/d at the beginning of 2017, up from 221,000 b/d in Q3 this year. Consumption from smaller buyers in Asia has also increased. Indian fuel oil demand was 18,000 b/d higher in June than in the same month last year, reaching 130,000 b/d-a year-on-year rise of 17%. Pakistan has also been buying record volumes: in May, it bought 1.54m tonnes (13m barrels) of fuel oil delivery between then and August. In June, its imports were 47,000 b/d higher than a year earlier, reaching 150,000 b/d. Energy Aspects says this brings the country's implied demand for fuel oil to a 22-month high of 200,000 b/d.

Although regional fuel oil stocks have remained stubbornly high over the past few months, supplies will tighten thanks to weakening margins. Average fuel oil cracks versus Brent fell to around minus $12.40/b in Q2, down from around minus $10/b in Q1. The latest drop reduces the incentive for local refiners to pump out the product.

Meanwhile, imports into Asia from key suppliers in the Middle East and Russia have been declining. Middle Eastern fuel oil production in May was 210,000 b/d lower than a year earlier, at 1.35m b/d. This was mainly because of declines from Saudi Arabia, where production plummeted by 110,000 b/d, to 390,000 b/d, Energy Aspects said. Saudi consumption has also been increasing.

Supplies from Russia are also in long-term decline as refineries curb runs in response to a rising tax burden and facility upgrades. In May, the country's fuel oil exports fell for the fourteenth consecutive month, down to 0.98m b/d-a drop of 420,000 b/d.

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