* Strong margins occurring despite higher crude prices
* Supplies from Russia, Venezuela have fallen
* Refinery upgrades further dent fuel oil yield
* But fuel oil inventories remain high despite supply cuts
By Roslan Khasawneh
SINGAPORE, Nov 14 (Reuters) - Fuel oil refining margins in Singapore closed in October 30 percent higher than the same time a year ago despite rising crude prices and may remain elevated as OPEC is expected to continue propping up the oil price by withholding supplies of fuel oil rich grades.
Fuel oil is the residue oil product left after basic crude refining and is used mostly for powering engines on large ships and for electric power generation. As such, it tends to have negative profit margins for refiners.
The discount of 180-centistoke fuel oil in Singapore to benchmark Brent crude at the end of October this year was $3.90 a barrel versus a discount of $5.59 at the end of October 2016.
The margin has remained high even as Brent crude climbed to its highest since 2015 last week. Fuel oil was at a discount of $3.71 a barrel on Nov. 6, when Brent closed at $64.27, the highest close since June 23, 2015.
When Brent was last above $60 a barrel, the fuel oil margin was at a discount of $8.66 a barrel.
“At such high crude prices, cracks are surprisingly strong,” said Nevyn Nah, oil products analyst at Energy Aspects in Singapore, using another term for oil product margins.
The Organization of the Petroleum Exporting Countries (OPEC) and other producers, including Russia, have been restricting their crude production to reduce a supply overhang that has dogged markets since 2014.
The pact expires in March 2018, but OPEC is expected to agree to an extension during its upcoming meeting on Nov. 30.
The strong fuel oil margins are a result of lower availability since the OPEC cuts have reduced fuel oil flows because their cuts have focused on crude grades that yield the most fuel oil.
Refinery upgrades in India and Russia have resulted in lower fuel oil yields as those plants have boosted their output of higher profit fuels like gasoline or diesel at the expense of the residual fuel.
September fuel oil output from top supplier Russia sank to a record low, cutting exports the lowest level in almost a decade.
Refinery outages in Venezuela, another leading fuel oil supplier, have also fallen amid an escalating political and economic crisis.
The higher margins provides an incentive for so-called simple oil refineries, which lack the ability to upgrade fuel oil to gasoline and diesel, to maximise their output, preventing a drawdown of high inventories.
“These high (fuel oil margins) make the running of simple refineries more profitable,” said Sukrit Vijayakar, Managing Director at energy consultancy Trifecta.
“The drop in stocks is not happening because simple refineries could be running at higher rates than previously,” he added.
Weekly fuel oil stocks in Singapore are 13 percent higher from the same time last year, while inventories in the Amsterdam-Rotterdam-Antwerp hub are up 122 percent from a year ago, official data shows. STKRS-SIN STK-FO-ARA
Reporting by Roslan Khasawneh; Editing by Henning Gloystein and Christian Schmollinger