Shipping demand drives up fuel oil

Fuel oil for the first time in two years is rising faster than gasoline, jet fuel and diesel, increasing the cost of ocean freight and electricity.

Demand for the fuel used in marine engines and power plants is accelerating because the world shipping fleet is growing at a record pace. Refiners are selling less fuel oil, the residue from refined crude, as they invest $20 billion over the next five years in more-profitable products.

"Every new refinery wants to produce more gasoline and diesel and cut back fuel oil," said Simon Neo, a broker with the Singapore unit of Norway-based Wilhelmsen Bunkers SA. "And more ships coming into the market adds up to a supply crunch."

Fuel oil's gains will increase earnings at refiners Valero Corp, ConocoPhillips and Royal Dutch Shell Plc, while costs will rise for shipowner A.P. Moeller-Maersk A/S and Tokyo Electric Power Corp. Utilities may burn more natural gas, increasing demand for North America's second-largest energy source.

The rebound in fuel oil spurred Morgan Stanley, the biggest oil trader on Wall Street, to hire specialists in handling the commodity, the cheapest and dirtiest of liquid fuels. In Singapore, Asia's trading hub, Morgan Stanley competes for cargoes of the fuel with BP Plc, Royal Dutch Shell Plc, Chevron Corp, Glencore International AG, Trafigura AG and Goldman Sachs Group Inc.

The price for US fuel oil tripled in the past decade, while gasoline gained 2.3 times and diesel 2.4 times, according to data from the International Energy Agency in Paris.

Every 42-gallon barrel of West Texas Intermediate crude yields 14 gallons of fuel oil when run through a typical refinery, according to New York-based Energy Intelligence Group. With new equipment, including a so-called coker, fuel oil production can be eliminated from each barrel.

Morgan entered the market in the US with last year's acquisitions of TransMontaigne Inc, an oil-terminal owner in the Midwest, and Heidmar Group, a fuel distributor, said Mark Lake, Morgan's spokesman.

The investment bank started trading fuel oil cargoes in Asia this year, after hiring Alan Kendall, formerly of Chevron, the second-largest US oil company. The bank chartered the Titan Chios, a 2 million-barrel tanker, to anchor in Malaysian waters for use as storage to support its trading in the region.

Growing scarcity

A scarcity of fuel oil has worsened since October after the Organization of Petroleum Exporting Countries, led by Saudi Arabia, curbed oil production. Members reduced supplies of their lowest-priced crudes, varieties that yield relatively more fuel oil when refined.

"OPEC's cutback has helped fuel oil to power up," said Anthony Nunan, assistant general manager for energy risk management in Tokyo at Mitsubishi Corp, Japan's biggest trading company.

Fuel oil has advanced so fast that the rally threatens to curb demand, particularly from power generators who can turn to natural gas. Natural gas sold for $5.335 per million British thermal units on the New York Mercantile Exchange at 8:31 am Singapore time yesterday. Fuel oil prices are equal to $8.77 per million British thermal units on the US Gulf coast, Bloomberg data show.

Customers are paying more on the world's busiest shipping lanes, from Asia to the US.

Fuel surcharges now add about $500, or 31 percent, to the cost of sending a 20-foot container, currently at about $1,600.

Japan's price increase

In Japan, utilities are running oil-fired generators after an earthquake shut Kashiwazaki Kariwa, the world's biggest nuclear plant, owned by Tokyo Electric Power.

Electricity prices in Japan, Asia's largest economy, are gaining as power producers pass on rising fuel costs. Tokyo Electric Power, Asia's biggest power producer, plans to charge an average household using 290 kilowatt-hours of power a month 6,417 yen ($55.13) between October and December this year. This compares with 6,142 yen the average family paid the utility the same period in 2004.

About 37 percent of global fuel oil supply is consumed in Asia, compared with 19 percent in Europe and 10 percent in North America, according to BP's Annual Statistical Review of World Energy. The rest is burned in Africa and Latin America.

World economic growth is spurring the increase in shipping demand.

The International Monetary Fund forecasts a 5.2 percent expansion in 2007, extending the longest period that growth rates have held above 4 percent since the early 1970s.

More than 8,000 vessels are on order for delivery by 2012, compared with the existing global fleet of 10,729, according to London-based Clarkson Plc, the world's largest shipbroker.

Bloomberg News

(China Daily 09/05/2007 page16)