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Last month, fuel oil exports bound for the U.S. Gulf Coast hit their lowest level since January 2019, signaling weakened refinery demand due to softening margins. High sulfur fuel oil and heavy residues, which can be refined into higher value products like gasoline and diesel, saw a significant decline in loadings to the Gulf Coast, dropping by a third to 260,000 barrels per day in August.
Cargoes departing Mexico for the Gulf Coast also decreased by 25%, hitting 77,000 bpd, the lowest level since July 2021. Refinery margins are not strong enough to incentivize U.S. Gulf Coast refiners to run their secondary units harder to process fuel oil, leading to reduced utilization rates.
The attacks on vessels crossing the Red Sea have further hindered fuel oil deliveries from east of Suez to the U.S. Gulf Coast, pushing shippers to divert around the horn of Africa. Yemen's Houthi militia's disruptions in the Red Sea have impacted global shipping, with vessels like the AFRODITI and SEAMAJESTY sailing around the Cape of Good Hope to avoid the Red Sea.
Despite the challenges, Saudi imports of fuel oil surged to 385,000 bpd in August, a 25% increase from the previous month and a 40% rise from the previous year. The analysis of the most recent data from the Energy Information Administration shows that Gulf and East Coast combined operating refining capacity accounted for just under 60% of total U.S. capacity as of June 2024.
Analysis Breakdown:
In essence, the decline in fuel oil exports to the U.S. Gulf Coast indicates a weakening demand from refineries due to softening margins. This could have implications for the refining industry, as reduced utilization rates of secondary units can impact the production of higher value products like gasoline and diesel.
The attacks on vessels crossing the Red Sea have also disrupted fuel oil deliveries, leading shippers to seek alternative routes, contributing to the drop in imports to the U.S. Gulf Coast. Despite these challenges, Saudi Arabia has seen a significant increase in fuel oil imports, highlighting shifting dynamics in the global energy market.
Overall, these developments suggest a complex interplay of factors affecting the fuel oil market, from refinery demand and margins to geopolitical disruptions impacting shipping routes. Understanding these dynamics is crucial for investors and market participants looking to navigate the evolving landscape of the energy sector.