ANALYSIS-Asian fuel oil feels heat of tightening supply

By Luke Pachymuthu and Max Lin

SINGAPORE, July 28 (Reuters) - The perennially oversupplied Asian fuel oil market may change into one of the tightest in the next five years, as a massive programme of refinery upgrades cuts supplies and Middle East demand surges.

This will cut supplies available for the fuel oil-driven utility sector in South China, the manufacturing hub in a booming country already at risk of a power crunch this summer due to low coal stocks.

Production of the the heavy-sulphur oil residues used to drive ships are also net short in Asia, which could hit growth of the marine sector and lead to higher freight rates to cope with pricey fuel that makes up more than half of operational costs.

Fuel oil shipments look set to be squeezed worldwide, as over 7.354 million barrels per day (bpd) of new secondary unit capacities come online in the next five years, International Energy Agency (IEA) data show.

"Globally, if you go by the announced plans for refinery build up, you'll find that the world will move into an increasing net deficit of fuel oil," said Alexis Aik, a senior consultant at FACTS Global Energy Group.

Rising fears over a squeeze in Western supplies into Asia have improved the price difference of fuel oil to Dubai crude to $15.50 a barrel discount in mid-July, its strongest end-January.

Barely a month earlier, it was at a record-low discount near $30 a barrel and oil brokers expect the values to remain firm at a discount of $13-$16 a barrel between 2009-2012.

HEAVY UPGRADES