Why are Fuel Oil Prices Rising?
Nov 27 2020 Read 520 Times
In an unexpected boost for the energy industry, fuel oil prices are soaring in response to extended OPEC+ production cuts. Produced during the gasoline and diesel distillation process, fuel oil is a byproduct that usually has little value compared to more coveted petroleum products. However, thanks to a combination of factors fuel oil is now enjoying a significant price rally that could continue into 2021.
Production cuts drive price surge
OPEC+ countries such as Saudi Arabia and the UAE generally produce crude that is dense and high in sulphur. These properties result in a large amount of fuel oil, a byproduct primarily used to power steam boilers in industrial plants and ships. While fuel oil is generally cheap and easy to obtain, OPEC+ production cuts have sparked concerns a shortage could be imminent. Analysts predict cuts could continue well into 2021, which would add to the fuel oil shortage and push up prices even further.
Wood & Company analyst Jonathan Lamb says observing fuel oil price trends can reveal a lot about the sentiment of investors and the state of the market. “If the market expects a significant increase in heavy oil supply, fuel oil futures would sag, at least a bit,” explains Lamb. “So strength in fuel oil could be a sign that the market expects the crude increases to be delayed.”
Shipping supports fuel oil demand
Other analysts credit the thriving shipping industry as a key driver of the price rally. While the aviation industry was hit hard by the coronavirus pandemic, demand for shipping remained strong and as a result has bolstered the fuel oil industry.
Hopes of a COVID-19 vaccine have also provided much needed support to the energy industry. Stocks recently soared on hopes a vaccine will drive a global economic recovery and restore crude demand to pre-pandemic levels. The positive trend has been building for more than a month, with Brent crude prices increasing by more than 27% over the past four weeks. US crude prices have also increased by more than 25%, settling at almost US$45 a barrel. This represents the highest levels seen since March.
Want to know more about the latest industry developments? From increasing crude oil distillation yields to speeding up quality control checks at loading terminals, ‘Development of a Benchtop NMR Crude Oil Analyser’ explored the enormous potential of Nuclear Magnetic Resonance (NMR) Spectroscopy technology.
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