Source: U.S. Energy Information Administration, based on Bloomberg
The difference between high-sulfur residual fuel oil prices in Singapore and crude oil prices in Dubai/Oman has been narrowing since the spring. Low inventories of residual fuel oil in Singapore and lower residual fuel oil production from Russia are likely contributing to the narrowing price spread.
Residual fuel oil, the petroleum product remaining after higher-value liquids such as gasoline feedstocks and distillate are distilled from crude oil, typically sells at a lower price than crude oil. Residual fuel oil is used in many sectors, including marine transportation, power generation, commercial furnaces and boilers, and various industrial processes.
For many Asian countries, petroleum product prices tend to follow Dubai/Oman crude oil, which is the benchmarkMiddle Eastern crude oil exported to Asia. Moreover, because Singapore is the largest global hub for marine ships to refuel, the residual fuel oil spot price at Singapore is considered representative of the region. Dubai/Oman crude oil is classified as a medium and sour crude oil because of its relatively low API gravity (density) and high sulfur content compared with light, sweet crude oils such as Brent.
Relatively high demand and relatively low inventories are both contributing to the increase in the price of Singapore residual fuel oil relative to the price of Dubai/Oman crude oil. In Singapore, residual fuel oil inventories were 22.2 million barrels for the week ending June 28, slightly below the five-year average for this time of year but recovering from when they were more than 6 million barrels below the five-year average at the beginning of June. Residual fuel oil sales were up 4% year-to-date through May, according to the Maritime and Port Authority of Singapore. The recent diplomatic dispute between Qatar and Saudi Arabia, Bahrain, Egypt, and the United Arab Emirates, which included a ban of Qatari-flagged vessels entering the United Arab Emirates port of Fujairah, may have led some vessels to refuel in Singapore instead.
Source: U.S. Energy Information Administration, based on Bloomberg, International Enterprise
Regional crude oil production decisions are also affecting relative prices. The voluntary crude oil production reductions from several countries within and outside the Organization of the Petroleum Exporting Countries (OPEC), who tend to produce medium- and sour-grade crude oils, reduce the availability of these grades to refiners. Because of their relatively low API gravity (density), medium and sour crude oils yield more residual fuel oil from distillation than light, sweet crude oils. As regional refineries run more light, sweet crude oil, less residual fuel oil is being produced.
Russia, traditionally a large producer and exporter of residual fuel oil, has also reduced its production and exports over the past year. Several major Russian refiners completed investments in secondary refinery units, allowing them to further process residual fuel oil into higher-value liquid fuels. Furthermore, changes in Russia’s export taxes have affected their trade. Before 2017, Russian exports of residual fuel oil were taxed at a lower rate than Russian exports of crude oil. In January, however, the tax rate for residual fuel oil was raised to equal that for crude oil.
Source: U.S. Energy Information Administration, based on Joint Organizations Data Initiative
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Headline crude prices for the week beginning 11 March 2019 – Brent: US$66/b; WTI: US$56/b
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In 2017, Norway’s Government Pension Fund Global – also known as the Oil Fund – proposed a complete divestment of oil and gas shares from its massive portfolio. Last week, the Norwegian government partially approved that request, allowing the Fund to exclude 134 upstream companies from the wealth fund. Players like Anadarko Petroleum, Chesapeake Energy, CNOOC, Premier Oil, Soco International and Tullow Oil will now no longer receive any investment from the Fund. That might seem like an inconsequential move, but it isn’t. With over US$1 trillion in assets – the Fund is the largest sovereign wealth fund in the world – it is a major market-shifting move.
Estimates suggest that the government directive will require the Oil Fund to sell some US$7.5 billion in stocks over an undefined period. Shares in the affected companies plunged after the announcement. The reaction is understandable. The Oil Fund holds over 1.3% of all global stocks and shares, including 2.3% of all European stocks. It holds stakes as large as of 2.4% of Royal Dutch Shell and 2.3% of BP, and has long been seen as a major investor and stabilising force in the energy sector.
It is this impression that the Fund is trying to change. Established in 1990 to invest surplus revenues of the booming Norwegian petroleum sector, prudent management has seen its value grow to some US$200,000 per Norwegian citizen today. Its value exceeds all other sovereign wealth funds, including those of China and Singapore. Energy shares – specifically oil and gas firms – have long been a major target for investment due to high returns and bumper dividends. But in 2017, the Fund recommended phasing out oil exploration from its ‘investment universe’. At the time, this was interpreted as yielding to pressure from environmental lobbies, but the Fund has made it clear that the move is for economic reasons.
Put simply, the Fund wants to move away from ‘putting all its eggs in one basket’. Income from Norway’s vast upstream industry – it is the largest producing country in Western Europe – funds the country’s welfare state and pays into the Fund. It has ethical standards – avoiding, for example, investment in tobacco firms – but has concluded that devoting a significant amount of its assets to oil and gas savings presents a double risk. During the good times, when crude prices are high and energy stocks booming, it is a boon. But during a downturn or a crash, it is a major risk. With typical Scandinavian restraint and prudence, the Fund has decided that it is best to minimise that risk by pouring its money into areas that run counter-cyclical to the energy industry.
However, the retreat is just partial. Exempt from the divestment will be oil and gas firms with significant renewable energy divisions – which include supermajors like Shell, BP and Total. This is touted as allowing the Fund to ride the crest of the renewable energy wave, but also manages to neatly fit into the image that Norway wants to project: balancing a major industry with being a responsible environmental steward. It’s the same reason why Equinor – in which the Fund holds a 67% stake – changed its name from Statoil, to project a broader spectrum of business away from oil into emerging energies like wind and solar. Because, as the Fund’s objective states, one day the oil will run out. But its value will carry on for future generations.
The Norway Oil Fund in a Nutshell