Asian refiners could seek more heavy sour crude if fuel oil cracks strengthen further as distillates weaken, giving a lift to differentials of such grades that have been in the doldrums in recent months, industry sources said on Thursday. Fuel oil cracks have improved more than 55 percent to a discount of $12-$13 a barrel - the strongest in seven months - from its record low of almost minus $30 in early June, due to tightening supply flows into Asia. Inversely, diesel's premium to Dubai crude has fallen more than $16 a barrel from its peak in end-May to nearly $29, as Chinese demand is set to dip after the Olympics and regional supply has been boosted by the recent focus on distillates production. “I believe it's a case where we have seen the end of the run for distillates, at least until the winter season kicks off in the United States,” a North China-based trader said. Saudi Arabia will not resume spot fuel oil exports after its peak summer demand season due to persistently strong requirements from domestic power plants and new secondary refining units. “The fuel oil cracks are strengthening in large part because of the cut in fuel oil exports from Saudi Arabia,” said Jeff Brown of FACTS Global Energy. Iran, a regular exporter of fuel oil to Asia, will also halt shipments from August as it builds domestic stocks ahead of winter, and due to a heavy fourth-quarter maintenance season, industry sources said. “Clearly we are seeing supplies from the Middle East dry up because of the strong domestic demand and this is giving fuel oil a real boost,” a Singapore-based trader said. Excess supply and softening global demand have also pushed Asian gasoline cracks into the red in past weeks for the first time in recent years. As the price spreads between fuel oil and higher grade products narrow, industry sources said refiners could look into processing heavier crude to capitalise on the improving margins for fuel oil and to meet the shortfall in the region as demand held steady. In Asia, the differential between spot gas oil and residual fuel was pegged at $40-42 a barrel, narrowing from $64-66 in late June, while gasoline's premium to fuel oil fell nearly $26 to $11-13 a barrel over the past month. “Directionally, if the fuel oil crack improves, demand for heavy crudes from refineries could rise,” said Victor Shum, an analyst with energy consultancy Purvin and Gertz. Even after a run of upgrades, aimed at yielding higher-value products from residues, Asian refineries could still adjust output levels of fuel oil if margins improve further, Shum said.
