Russia Fallout Helps Refiners Squeeze Cash From Bottom of Barrel

(Bloomberg) -- The bottom of the barrel has provided some rare returns to refiners as the market for fuel oil tightens due to curbed Russian flows and soaring demand from the power sector.

Profit margins in Asia have rebounded for fuel oil -- often used in shipping and the least valuable mainstream refined product -- rising to its highest premium in more than two years on Wednesday. Russian shipments have dropped after most buyers shunned its energy products due to the war in Ukraine.

Utilities in Asia are also turning to fuel oil for power generation after natural gas prices surged, driving up demand for the highly-pollutive energy source. That coincides with greater seasonal consumption in the Middle East.

High-sulfur fuel oil exports from the Middle East that would typically be sent to Asia are now being diverted to the U.S., contributing to the tight Asian market, according to J.Y. Lim, a Singapore-based oil analyst at S&P Global Commodity Insights. The U.S. has banned imports of Russian fossil fuels.

Fuel oil profit margins in Singapore surged to $2.21 a barrel on Wednesday, but have since pulled back to a discount, according to Bloomberg Fair Value data. Returns were at a discount throughout 2021 and most of 2020.

Russia’s war in Ukraine has upended global fuel and oil markets as financial sanctions and the prospect of reputational damage prompt most buyers to seek alternative sources. That’s tightened other markets and boosted profit margins for fuels such as diesel and gasoline.

More stories like this are available on bloomberg.com

©2022 Bloomberg L.P.