The low crude and fuel oil price environment has resuscitated talk about run cuts at Russian refineries, though traders remain uncertain about the actual moves.
"There are a lot of expectations for a production drop in Russia," a fuel oil European trader said.
A Northwest European naphtha trader said: "[Regarding] Russian run cuts, I think they're definitely happening, the question is to what magnitude."
According to a second naphtha trader, flows of products out of Russia are already smaller.
"There is less naphtha supply from Russia as [refinery] margins are not good in Russia," the trader said.
Export netbacks -- the return from exports after transportation costs and taxes -- for Russia's main export-oriented products, diesel and fuel oil, have been consistently low, with fuel oil netbacks for many refineries even estimated to be in negative territory.
"For many [refineries] the export netback is zero or even negative," said a source. "How long they can survive is not clear."
Weak fuel oil prices in Northwest Europe, a prime market for Russian fuel oil, have been exacerbated further by rising domestic railway tariffs which for refineries situated far from ports has led to transportation costs exceeding sales prices.
The higher fuel oil export duty as of January, aimed at encouraging refineries to upgrade their secondary units, has further dented revenues. "All refineries are just about breaking even," said a Russian products trader.
REDUCED PROCESSING
With throughput apparently unchanged and fuel oil output going strong, lower throughputs are seen as a way out.
"There is a glut of fuel oil and the only option is to reduce processing," said another source.
But despite the deteriorating economics, especially for smaller refineries, there have been hardly any confirmed reports of reduced throughput.
"It is not that easy to mothball production," a Russian trader said.
While last year the big refineries cut their primary processing near to the level of secondary units, aiming to process as much as possible of the residue into light products, the smaller and simple refineries have been running as normal.
"They either have to fully shut down or work at full capacity," said a source.
LOW CRUDE PRICE
Last year, small refineries "somehow managed to get by," a trader said.
But this year they are all monitoring the situation with growing anxiety amid falling crude prices leading to a narrowing spread between the crude and oil products export duties. Russia's export duty for oil product exports are set as a percentage of the crude export duty, with the difference between the two regarded as an indirect assistance to refineries.
The higher the price of Urals, the wider the spread between the crude and products export duties.
But at lower Brent and Urals prices, the spread narrows and makes refinery economics much less attractive.
LOWER RUNS IN TURKMENISTAN
The lower international benchmarks have already resulted in suppliers outside Russia reducing their feedstock exports, according to sources.
There are no low sulfur straight run loadings from Turkmenistan in the direction of Europe, a trader said.
The country's main refinery Turkmenbashi is not "loading, because the price is too low," the source added.
For the moment ongoing exports to nearby countries in Central Asia are allowing the plant to keep running, albeit at low levels.
In Russia, domestic demand for fuel oil had somewhat offset the unfavorable export conditions, as dropping prices had made it more attractive for heating compared to natural gas, according to traders.
Traders expect production drops at refineries to result in less HSSR flows, though for now those expectations are muted.
"Overall I do not think there will be a big reduction in Russian cracked exports, but cannot quantify," a trader said.
The situation remains unpredictable and is to a large degree dependent on prospects for the fuel oil market.
After reaching a 14-year low Monday, Rotterdam HSFO barges rebounded and cracks strengthened.
Falling stocks in Singapore and cheap freight are likely to improve west-to-east arbitrage economics. In its recent report, the port of Rotterdam attributed an increase of products throughput to large volumes of Russian fuel oil "which is shipped to the Far East via Rotterdam."
Whether the same trend will repeat this year remains to be seen.
