Fuel Oil Refining Margin to Rise on Lower Supply, Lehman Says

By Nesa Subrahmaniyan and Yuji Okada

Aug. 19 (Bloomberg) -- The refining profit, or margin, to make heavy fuel oil will rise through 2010 as production falls amid refiners' investment to make more expensive gasoline, diesel and jet fuel, Lehman Brothers Holdings Inc. said.

New York Harbor fuel oil's so-called crack, or margin, to crude may narrow to minus $10 a barrel in 2009 from an estimate of minus $22 a barrel this year, Lehman analysts Michael Waldron, James Crandell and Edward Morse said in a report titled ``Bottoms Up'' dated Aug. 18. Fuel oil is mainly used for electricity generation and to power ships.

The analysts forecast Singapore 180-centistoke fuel oil to strengthen to minus $9 a barrel in 2009 from $29 a barrel this year in relation to Dubai crude, a Persian Gulf benchmark for Asian refiners.

Oil refiners worldwide are investing in units and equipment, which can increase the yield of fuels such as gasoline, diesel and jet fuel, known as light and middle distillates. Fuel oil is a residual by-product from processing crude oil and increased refinery investments to process the product into light and middle distillates is cutting supplies, the Lehman analysts said.

Fuel oil's crack spread to Dubai crude, a Persian Gulf benchmark, has narrowed 74 percent in Singapore, Asia's biggest oil-trading center, from $30.456 a barrel on June 10 to $8.027 on Aug. 14, according to data compiled by Bloomberg News. The differential is a measure of profit or loss from processing Dubai crude.

The analysts expect the spread won't be influenced by demand from end-users such as power companies in the Middle East and the shipping industry in the medium term. This is because ``faltering global economic growth could leave demand more exposed to the downside,'' the report said. A slowdown in global shipping, combined with increased shipping efficiency, could minimize fuel oil consumption by the industry, said the analysts.

Most of the incremental demand of the fuel from shipping and power should come from Asia, keeping prices steady in the region, Lehman said. ``Curtailed HFO supplies during tight summer months in the Middle East affect Asia more than Europe,'' as the majority of upgrading units addition will occur in Asia, said the report.

To contact the reporters on this story: Nesa Subrahmaniyan in Singapore at nesas@bloomberg.net; Yuji Okada in Tokyo at yokada6@bloomberg.net.