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At least one part of the oil industry should be happy about OPEC+’s easing of production cuts beginning this month, and this part is refiners who have been forced to boost their intake of high-sulfur fuel oil to replace heavy crude their refineries need but cannot get.
U.S. sanctions on Venezuela and Iran have been one reason for the deficit of heavy crude that gave refiners a headache and forced them to switch to high-sulfur fuel oil as an alternative feedstock, but the OPEC+ cuts also contributed to the shortage, Bloomberg writes in a report. As a result, these refiners had to switch to so-called dirty fuel oil, a byproduct of crude oil refining. Some refiners that are not equipped for handling the fuel oil had to shut down because the feedstock became too expensive.
This deficit occurred during a seasonal jump in consumption of the heavy oil derivative: in the Middle East, imports of high-sulfur fuel oil rise during the summer months because it is used for electricity generation and demand for electricity rises during the hottest season of the year. At the same time, India was buying more high-sulfur fuel oil, too, with imports from January to July three times higher than imports for the same period of last year.
Meanwhile, production of high-sulfur fuel oil has shrunk following the entry into effect of new emissions regulation from the International Maritime Organisation, which mandates that vessels either use fuel that contains no more than 0.5 percent of sulfur content or equip with a so-called sulfur scrubber.
As a result of this combination of trends, the deficit on the high-sulfur market reached half a million barrels daily last month, Bloomberg reports, citing figures from JBC Energy. Thanks to the relaxation of OPEC+ production cuts, this should ease to some 100,000 bpd by the end of the year.
By Irina Slav for Oilprice.com
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Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.
OPEC+ decided to ease 900,000 bpd of production cut right now when around 85-90% pre-covid demand is already back on track compared to its almost close to 10,000,000 bpd production cut decided some months back.
So this tells us that supply from OPEC+ likely to remain lower & we will keep on seeing weekly inventory or supply levels dropping widely.
The ease is really modest, won't see any big price correction for oil.