Noble Group to trade fuel oil globally -sources

By Yaw Yan Chong

SINGAPORE, March 27 (Reuters) - Noble Group (NOBG.SI) will start trading physical fuel oil globally for the first time after employing at least five traders, expanding at a time when most such firms are downsizing, industry sources said on Friday.

They said the commodity trader's move could be linked to expectations they could gain from potentially firm trade margins due to tightening residual fuel supply as Asian and European refineries upgraded over the past two years, with more to come.

All five hires were formerly from Trafigura, who left the European trading house in the past year, and are expected to be based in the three trading centres of London, New York and Singapore. Its fuel oil business is due to start on April 1.

The head of the team is expected to be Magd Mohaffel, formerly Trafigura's global head of fuel oil.

"The Noble Group has a long-term strategy and will continue investing selectively in the downcycle in people and assets," Chief Operating Officer Ricardo Leiman said when asked about the move. "We want to expand our energy business globally and will continuously look at synergizing our energy assets."

In the past year, several firms have either stopped trading physical fuel oil, such as Hong Kong-listed Titan Petrochemicals (1192.HK), or exited oil trading, such as Swiss-based Projector.

Fuel oil supply capacity in Asia, following the opening of three new terminals with a total of 4-5 million cubic metres (cu m) since end-2006, has increased substantially but has not been balanced by a similar increase in demand.

The product has been dependent on demand from the marine fuels market, which sees steady volumes of about 3 million tonnes a month, while swing buyer China accounts for 1.0-1.5 million tonnes of refining feedstocks, bunker and utility fuel monthly.

"It's been a tougher market ever since the new terminals came on stream because everyone's share of the pie has gotten smaller. Now, with the economic downturn, demand is shrinking even more, especially from the bunker market," a Singapore-based trader said.

"It's not exactly a good time to come in."

SEEKING STORAGES

Industry sources said Noble has been enquiring on the availability of long-term storage terminals but all existing tanks have been taken on long-term leases, despite the jump in commercial capacity to 5.5 million cu m from 2.95 million cu m.

Despite the fully-leased tanks, traders said the expanded capacities have not been fully utilised, with throughput levels falling to around 0.6-0.8 turns per month, down from 1.2-1.4 turns before the new capacity came online.

Noble's options would either be to take up a secondary short-term lease from another trader that is not fully utilising its tanks or to lease floating storages off Malaysia.

Noble had made a foray into Asia's physical fuel oil market three to four years ago before abandoning the move after less than two years, with both its traders leaving the firm. But it continues to trade in the derivatives market.

"They have always been interested in the fuel oil market. They probably believe they can benefit from the currently strong market. Plus, they have a ready-made, experienced global team now," a fuel oil trader said.

The fuel oil market has been unusually strong since last December, with its prompt crack spreads narrower than a discount of $10 a barrel to Dubai crude since Jan. 6.

Despite an anticipated demand slowdown, particularly from the bunker market, tightening supplies have offered support.

Refineries across India, China, South Korea and Malaysia are planning to upgrade over the next two to three years to allow them to boost the yield of higher-value products such as gasoline and diesel at the expense of fuel oil.

Fuel oil's front-month crack spreads to Dubai crude averaged at minus $5.77 a barrel as of 0400 GMT Friday, versus last year's average of minus $15.60. (Editing by Ramthan Hussain)