VLSFO markets await Al-Zour volumes amid tight supply

Kuwait's new 615,000 b/d Al-Zour refinery is slated to bring volumes of 0.5% sulfur marine fuel online that rival the entire output of the Mediterranean, at a time of tight supply.

The refinery's 40% residuals yield implies 1 million mt/month of 0.5%S or 1%S fuel oil, which will "fundamentally change" those markets in Europe and the Middle East, a trader said.

The volume is comparable to low (1.0%) and very low sulfur (0.5%) production in the Mediterranean region which can be up to 1 million mt/month and in some cases exceeding it, according to Kpler shipping data and market sources.

The refinery was expected to be operational in July with full ramp-up set in the first quarter of 2023, a person familiar with the matter has said.

That will provide relief to a very low sulfur fuel oil market which has been supported by strong middle distillates.

Factors including low diesel stocks in Europe and backwardated markets have kept diesel prices high, which has contributed to a record widening of light-heavy spreads, such as the Hi-5, said Rebeka Foley, oil analyst at Platts Analytics, part of S&P Global Commodity Insights.

"With EU sanctions coming into effect against Russian-sourced refined products in February 2023, Europe will have to backfill lost Russian volumes, and greater imports from sources such as the Middle East could provide some reprieve to upward price pressure in Europe," Foley said.

The refinery will be one of the largest globally and represents a significant addition to global refining capacity.

"The war in Ukraine has exacerbated tightness in the oil market but even more so in products markets," Homayoun Falakshahi, senior commodity analyst at shipping software tracking data firm Kpler said on his company's website.

That could open the way for other players to try and fill the gap and one of them could be Kuwait, Falakshahi said.

Hi-5 in spotlight

The refinery's start-up means Kuwait will be expected to buy cheaper 3.5%S (high sulfur) fuel oil and high sulfur straight run for domestic consumption and export more expensive VLSFO or LSFO.

That could mean an important role for the VLSFO/HSFO spread, known as the Hi-5.

Platts, part of S&P Global Commodity Insights, assessed the front-month FOB Northwest European barges Hi-5 at $258.75/mt on July 18.

The spread has seen record highs in 2022 amid volatility injected into markets by Russia's invasion of Ukraine. Russia is a major supplier of marine fuels and has faced far-reaching sanctions.

Late summer exports

Al-Zour's exports are expected at the end of August or start of September, with one train partly operational already while there will be three trains once production is at full speed, the trader said.

The first phase, one of three planned for the refinery, will start in July and includes the processing of about 200,000 b/d of crude. Al-Zour started test runs in 2020 and was initially expected to come online by the end of 2021, but this was then extended to June 2022. The refinery has six trains of the world's largest atmospheric residue desulfurization (ARDS) units.

The refinery is owned by Kuwait Petroleum Corp, which did not respond to requests for comment.

Al-Zour Refinery will process up Kuwaiti crudes to produce high value products and will have strategic storage capacity for 6.5 million barrels of low sulfur fuel oil, according to the refinery's website.