(Bloomberg) -- Fuel oil, the dregs left over after refineries make gasoline, diesel and other more valuable petroleum products, is soaring in price and traders are pointing to extended OPEC+ production curbs as a major driver of the rally.
The type of crude that comes from OPEC+ producers is typically dense and sulfurous, making it rich in fuel oil. The producer alliance curbed unprecedented amounts of supply earlier this year in response to collapsing demand. In turn, oil refineries cut output of the residue that's normally cheaper than crude. Now, with expectations fading that Saudi Arabia, Russia and others will bolster crude production come January, fuel oil supply may face longer curbs than previously thought.
“If the market expects a significant increase in heavy oil supply, fuel oil futures would sag, at least a bit,” said Jonathan Lamb, an analyst at Wood & Company, an investment bank. “So strength in fuel oil could be a sign that the market expects the crude increases to be delayed.”
Fuel oil traders said that expectations for longer OPEC+ supply curbs are probably feeding through into stronger prices. Another factor may also have been that demand for shipping -- a major source of fuel oil consumption -- has held up well despite the pandemic, further tightening the market.
High sulfur fuel oil for January, which can only be used in vessels that have sulfur-removal equipment, is trading at about $30 a ton less than Brent crude. That compares with a discount of almost $130 at the end of last year.
Tightness in the fuel oil market will also be sustained by reduced supply, consultant Energy Aspects Ltd. said in a report emailed last week, noting lower yields in Russia. Refinery runs are also increasingly shifting to more complex plants that have minimal fuel oil yields, according to the researcher. That too means lower supply.
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