European fuel oil market unmoved by Russian gas cut

LONDON (Reuters) - Russian cuts in gas to Europe via Ukraine have forced some of its neighbors to switch to burning fuel oil in power plants, but traders say even that has not revived an oversupplied European market for the product.

On Monday, benchmark 3.5 percent high sulphur fuel oil (HSFO) barges traded between $190 and $205 a tonne, a bit wider than Friday's close but down from last week's high range of $211-$219.

If there was any impact from countries running their utilities on fuel oil, traders said it would be seen in the "High/Low," a differential between HSFO and 1 percent low sulphur fuel oil.

"The High/Low swap is definitely going up. It's up over $20 (last week). One of the main reasons is the oil and gas situation, but there is also a cold wave, especially in France, and that would also increase the High/Low swap," one trader said.

Demand for HSFO has weakened as European countries have phased out the product, which is used in power plants and large industrial complexes, as environmentally hazardous, in favor of the less polluting LSFO.

Meanwhile, there is a surplus of LSFO in the European market, particularly in the Mediterranean, which supplies Adriatic and Black Sea countries.

HEATING CRISIS

Following a pricing dispute, Russia switched off gas intended for Ukraine's domestic use on January 1. The following day, supplies also began to be disrupted to neighboring countries.

Last week the main electricity and heat supplier in the Ukrainian capital said it had switched to fuel oil to compensate for falling gas supplies.

Austria on Monday became the latest to switch, flipping units at two gas plant sites to run on fuel oil.

"It is of course more expensive, there are more CO2 emissions, there are many technical issues, but we can carry on, hopefully not for too long, but for as long as necessary," said Tahir Kapetanovic, head of electricity at Austrian regulator E-Control.

Other countries, including Bulgaria, Poland and Hungary also said they were increasing fuel oil production or already using it to make up for the gas shortfall.

SMALL FRACTION

Fuel oil is a refined crude product traded in ports and financial havens around Europe in physical markets (barges, cargoes) and a futures market (swaps).

In a typical day of trading in the European Platt's market window, a half-hour session of public trade, roughly 20,000 to 50,000 kilotonnes of fuel oil changes hands.

The volumes of oil being burned to make up for lost gas have mostly come from storage rather than been bought in international trade and they are relatively small.

Hungarian oil and gas group MOL, which said it could meet the country's domestic fuel oil demand during the gas crisis, sold around 100,000-120,000 tonnes in 2008 -- much less than a day's trade in the Platt's window.

Storage is key to how easy it is to switch from gas to fuel oil, which unless locally available has to be shipped in.

"Most power plants have a fuel oil storage capacity of 5-10 days," said Andrew Ryan, head of European electricity research at Global Insight, a think-tank.

"Switching over from gas to fuel oil, once the decision is made, is a matter of hours," he said.

(Additional reporting by Sylvia Westall in Vienna, Anna Mudeeva in Sofia, Krisztina Than in Budapest, Patryk Wasilewski in Warsaw, Pavel Polityuk in Kiev; Editing by Sue Thomas)