In November 2021, there was more consumption of residual fuel oil (RFO) in the US, measured as product supplied, than for any month since January 2017. Consumption then set a series of weekly five-year (2016 – 2020) highs in December, according to the EIA’s Weekly Petroleum Status Report (WPSR). RFO is primarily consumed as vessel bunker fuel in the maritime shipping sector.
The increase in RFO consumption comes with record increases in maritime shipping volumes and rising high-sulfur fuel oil (HSFO) prices in Singapore. RFO inventories fell to five-year lows during this period of strong consumption. In addition to increased demand, low inventories also reflect less refinery production of RFO on a sustained basis as a result of longer-term market changes.
Until the end of 2019, US refinery production of RFO exceeded 300,000 bpd. In December 2019, production fell to 242,000 bpd and has not risen above 300,000 bpd since then, according to WPSR.
Beginning on January 1, 2020, the International Maritime Organization’s (IMO) tighter regulations on maritime fuel sulfur specifications went into effect. Fuel producers and shippers anticipated that the new regulations would disrupt the marine shipping industry over the course of 2020. Expecting a related decrease in HSFO demand in 2020, many US refiners began reducing their yield of HSFO in 2019 or earlier, or RFO more broadly, to avoid overproduction prior to the new regulation taking effect.
Substantially less refinery production prompted by the effects of the COVID-19 pandemic since the spring of 2020 has also contributed to lower overall production of RFO, which is largely considered a refining by-product. Refinery crude oil inputs and overall operations have been lower since the early 2020 start of the COVID-19 pandemic because of less demand for higher-value refined products such as gasoline and distillate. Refinery inputs have remained low in 2021, in part, because of refinery capacity closures that occurred during 2020.
Refinery yield of RFO is primarily determined by the quality of the crude oil processed and the technological configuration of the processing refinery. Crude oil grades with a low API gravity tend to produce a larger share of RFO and other low value residuum compared with higher API crude oils. Refineries can compensate for lower API crude oil by incorporating secondary unit conversion capacity into their refinery processes, which convert residuum and increase the overall facility yield of higher value products such as motor gasoline, light naphtha, and middle distillates. Secondary unit capacity additions are time and capital-intensive investments.
Beginning in late 2019, refineries began to shift from selling residuum to end users as RFO to using it as a secondary refinery input. Prior to 2019, net refiner inputs of residuum measured 1 percent or less of total net inputs. However, the specification shift brought on by the changing IMO regulations contributed to increased net inputs of residuum because refiners with sufficient conversion capacity purchased or reused discounted residuum as a feedstock instead of distributing it as fuel oil. By the end of 2019, and throughout most of 2020 and 2021, net residuum inputs to refineries were between 1.5 percent and 3.5 percent of total inputs, falling below that range on a monthly average basis only twice in the past two years, according to the EIA’s Petroleum Supply Monthly (PSM).
Prior to the IMO specification change, most RFO that was consumed in the global maritime shipping sector contained as much 3.5 percent sulfur, categorised as HSFO. Beginning in 2020, the IMO required ships to switch to fuels with a 0.5 percent sulfur content or less, forcing ships to use a more heavily treated variety of RFO called very low sulfur fuel oil (VLSFO). The change also increased demand for low sulfur marine gasoil (LSMGO), a variation on distillate fuel oil, which also reduced sulphur emissions and demand for RFO while contributing to increasing distillate demand.
Ships can comply with the IMO specification as long as their actual emissions meet the target sulfur emissions level, regardless of the fuel consumed. As a result, ship owners could install sulfur scrubbers to reduce sulphur emissions while still consuming HSFO and remain compliant. Although scrubbers are expensive and time consuming to setup and maintain, vessels can lower operating costs by purchasing HSFO instead of higher-priced VLSFO or LSMGO.
Although the IMO regulation applies to global shipping, marine vessels operating along the US coastline or in other areas within the North American or US Caribbean Sea Emission Control Areas (ECA) were already required to meet the 0.1 percent sulfur content requirement while operating within those waters.
US RFO consumption (measured as product supplied) decreased to well below the five-year low in April and May 2020. Globally, RFO accounts for a relatively small share of petroleum consumption.
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