US fuel oil exports to Europe near record, but trend may be shifting

Houston (Platts)--1Mar2013/1154 am EST/1654 GMT

US fuel oil exports to the Netherlands, Europe's primary demand hub, were the second-highest on record for 2012 but slowed in the latter part of the year, according to US data, signaling a shifting dynamic as domestic demand for the low-sulfur form of the fuel is on the way up. US exports to the Netherlands last year totaled 16.735 million barrels, according to federal Energy Information Administration data released Wednesday. That is the second-highest level since the EIA began tracking these exports, surpassed only by the 18.17 million barrels sent to the Netherlands in 2011. The Netherlands is currently the number two destination for US fuel oil exports, behind Singapore, having outpaced the ravenous bunker demand of Panama in 2008 as a result of a trend that started two years earlier.

Exports to the Netherlands leapt noticeably in 2006, after rarely cresting more than 2 million barrels annually. Exports that year jumped to 6.82 million barrels, nearly six times more than the 1.15 million barrels sent in 2005.

The sudden surge coincided with the introduction of the first sulfur emissions control area in the Baltic Sea in May 2006. The SECA limited marine fuel sulfur content to 1.5% sulfur as part of the International Convention for the Prevention of Pollution From Ships (MARPOL).

LSFO demand then continued to escalate over the next four years as new SECA areas covering the English Channel and North Sea came into effect and the sulfur maximum was further reduced to 1%S by 2010, with the US providing marginal 1.0%S barrels for European demand.

The SECAs greatly increased the need for LSFO in Europe, where demand is split between the bunker pool and power generation, and US producers have been eager to meet that 1.0%S demand.

"The 1%S bunker market is very big in Rotterdam and the 1%S production on the East Coast is often slurry with high metals that you can get much better value for over there, where it can be more easily blended into the 1.0%S bunker pool," a US fuel oil trader said. "Shell and Phillips 66 have been moving good volumes there."

Neither Shell or Phillips 66 would comment on their export volumes or products.

Previously, Panama had generally held the number two spot in total exports. US fuel oil exports to Panama in 2012 totaled 15.649 million barrels, lagging the Netherlands by 1.086 million barrels and marking the fourth year out of the last five that exports to the Netherlands have surpassed those to Panama.

The EIA does not break down fuel oil exports by sulfur level, but most of the barrels going to the Netherlands are likely low sulfur fuel oil, while Panamanian exports are mostly high sulfur fuel oil.

The Netherlands has significant local HSFO supply on hand to feed Rotterdam bunker demand, which the Port of Rotterdam puts at approximately 13 million mt, or 204 million barrels, annually. The creation of the 1.0%S European SECA zone created a need to import LSFO into Rotterdam to fill marginal bunker demand not met by local production, which must split LSFO between bunkers and power generation, market sources say.

Panama has no local fuel oil production and must import all the barrels it needs for its approximately 3 million mt, or 21 million barrels, of bunker demand, based on Panama Maritime Authority data. With Panama itself outside of the North American SECA, the bulk of its fuel oil imports and bunker sales are HSFO, with approximately 20% of demand taken up by LSFO.

LSFO EXPORT STRENGTH BEGINNING TO FADE

The ability of the US to feed marginal European LSFO demand was expected to shift following the introduction of the US portion of the North American SECA zone on August 1, 2012. The need for some 1.0%S barrels to remain in the US to feed domestic low sulfur bunker demand was expected to cut exports and create a push-and-pull dynamic between US and European LSFO demand, market sources said.

While it is too soon to say for certain if that has happened, preliminary data from the EIA suggests exports to the Netherlands may be beginning to slow.

Although total fourth-quarter export volumes to the Netherlands were also the second-highest on record, thanks to an uncharacteristic December, breaking out the data to reflect the August 1 SECA date paints a different picture. Export volumes from August to November, for instance, are down approximately 3.5 million barrels compared with the same August-November period in 2011, or 19%.

Going further back, when total exports to the Netherlands were lower, August-November 2012 exports are still down 200,000 barrels, or 6%, compared with the similar 2010 period and down 700,000 barrels, or 16%, compared with the same period in 2009. Full-year exports to the Netherlands totaled 9.8 million barrels in 2010 and 13.7 million barrels in 2009.

Q4 2012 export volumes were nudged higher by December numbers that were 18% above the five-year average for that month and significantly higher than individual December levels in most of the past five years. The exception again is 2011, the highest year on record for fuel oil exports, which is slightly anomalous, sources say.

"US demand stagnated and refineries found a customer in exporting products," a spokesman for the EIA said of 2011. Asian demand for fuel oil also peaked that year, another US fuel oil trader said.

US market sources had little to say about the atypical December 2012 jump, but a variety of factors could be in play. Demand in the East Coast for LSFO for power and heat generation was unusually light that month, due to milder than normal winter weather, while bunker demand saw its typical year-end drop as shipowners prepared for holiday-related supply-office closures.

That slowdown in demand also came at a time when fuel oil inventory holders are generally trying to turn their tanks and move inventory out due to year-end LIFO inventory tax rules.

It may be that these factors combined to make exporting fuel oil the best option, even though the arbitrage appeared closed on paper. --Joshua Starnes, joshua_starnes@platts.com

--Edited by Lisa Miller, lisa_miller@platts.com