Guangzhou, 11 October (Argus) — Chinese refineries may cut very low-sulphur fuel oil (VLSFO) production in the fourth quarter because of reduced blendstock and feedstock supplies.

Stronger bitumen demand has reduced bitumen supplies as a blending feedstock for low-sulphur fuel oil (LSFO), cutting VLSFO output in north and northeast China, according to refinery sources. Refineries in north and northeast China use sweet crude from oil fields like Daqing and Jilin to produce LSFO and use bitumen as blendstock to produce VLSFO.

Meanwhile, firmer gasoil and gasoline crack margins have encouraged refiners to produce more light distillates, cutting supplies of feedstock high-sulphur fuel oil (HSFO) from a crude distillation unit (CDU), which are usually fed into residual hydrotreating units to produce VLSFO. HSFO is a direct byproduct of a CDU.

VLSFO crack margins lag gasoil. China's VLSFO crack margins — measured by the spread between the Argus Zhoushan VLSFO bonded bunker price and front-month Ice Brent crude futures — rose only to $0.90/t from minus $0.40/t between 23 August and 8 October. But the gasoil crack spread, or the spread between China's domestic wholesale gasoil prices and front-month Ice Brent crude futures, rose from $80/t to $180/t over the same period when Ice Brent started to rise from $64.60/bl to more than $82.50/bl.

VLSFO output from Chinese refineries is mainly resold to the bonded bunker fuel market, with cargo exports not allowed.

Squeezed bunker supply margins have also put pressure on bunker suppliers to reduce purchases from domestic refineries, which are then forced to cut VLSFO output. Some bunker suppliers have been suffering from a widening spread between Argus Singapore 10ppm gasoil and VLSFO swaps, or the 5GO spread, as rising gasoil values push up purchasing costs amid a lag in VLSFO values, squeezing bunker supply margins. The 5GO spread rose from $55/t to $$124/t between 23 August and 8 October, Argus data show.

Chinese bunker fuel sales ticked up again in August to 18.2mn t from 16.1mn t in July, according to data from bunker suppliers, which cut prices to boost sales after taking too many stocks from refineries.

The spread between spot prices for Argus Zhoushan VLSFO bunker deliveries and their Singapore equivalent widened to minus $1.70/t in August from $1.30/t in July.

VLSFO bunker demand in China shows no sign of recovering yet as port congestion remains because of strict Covid-19-related checks at ports in east and south China. Demand in north China is starting to recover yet uncertainty remains because of China's continued energy consumption control policy, which may cause factories like steel mills to cut ore imports, reducing bulk carriers' demand for bunkers.

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