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. Last Updated: 07/27/2016

High Oil Prices Spur Refiners to Up Exports

LONDON -- Local refiners are set to unleash record volumes of fuel oil on to the European market this summer, seeking to cash in on high spot prices, analysts and traders said Monday.

Exports are set to soar in June and July to over 3 million tons per month from the Baltics and Black Sea ports combined, said Conrad Gerber, president of Geneva-based Petrologistics.

In 1999, 2.7 million to 2.8 million tons of fuel oil was exported during the same period, his figures show.

"It's due to high prices for exports and the increased competitiveness of Russian product because of the lasting affects of the [1998] ruble devaluation," said Ruslan Nickolov, an analyst with Nomura Securities in London.

This time last year, high sulfur fuel oil in the key Amsterdam-Rotterdam-Antwerp region was trading at around $80 a ton on a free on board - that is, goods delivered on board the vessel free of charge to the purchaser - basis.

This year prices are some $30 a ton higher, thanks to a sudden unexpected spike in crude futures prices.

Fuel oil makes up 40 percent of the product slate in domestic refineries.

"Some refiners on the edge of the Black Sea can expect netbacks of some $50 a ton while in the north the average is around $40. But those refineries closer to export terminals will see more like $60 to $70 on a netback basis - profits are there to be had," said one trader.

"It's the logical time to strike," Nickolov said. "In 1999 refiners were making reasonable profits when the prices were low. Now as international markets heat up it's turning into a bonanza for exporters and refiners as well."

A recent hike has taken benchmark Brent crude oil futures prices to around $29 a barrel. Brent retreated to $28.30 Monday but European refiners are still keenly looking for a cheaper alternative to crude to run their plants.

"I was expecting the fuel oil market to collapse [under the flood of exports] but nobody took into account the recent crude move. Feedstock demand for straight run has increased dramatically," said a dealer who regularly trades Russian product.

Traders estimate that 90 percent of the volume exported from Black Sea ports is high sulfur straight run with the split out of the Baltics at 75 percent straight run and 25 percent cracked.

The government's attempts to curb fuel oil exports to protect domestic supply have done little to dent exports, traders say.

The Fuel and Energy Ministry has limited May fuel exports to between 20 percent and 40 percent of output for different refineries, though the actual volume that materializes on to the spot market tells a different story.

Nomura's Nickolov believes that the decrees have had little impact because there was a direct incentive for the government to allow higher cash flows from producers - taxation.

"Fiscal reasons vie with political considerations and the latter are losing out," he said, adding that the chance to take higher taxes from refiners' boosted profits was too good to miss for central government.