Technical Terms

Furnace oil is defined as a dark colored fuel, either distilled or residual fraction of crude oil that is extracted while petroleum distillation and is used for the purpose of generation heat and power. This fuel is sticky, thick and glutinous in nature. Furnace oil is known by the name of fuel oil internationally and also as bunker fuel. The fuel oil consists of lengthy chains of hydrogen and carbon mainly alkanes, cycloalkanes and aromatics. Basically furnace oil is termed for relatively heavier commercial extracts from crude oil.

Overview

Furnace oil is largely an industrial fuel. It acts as a key ingredient in the generation of electricity and heat in a number of production units. It has been used since a long time for such purposes and has gained much importance and inevitable value. Fuel oil comes under the category of the heavier oils that include furnace oil, low sulfur heavy stock, residual fuel oil, lube oil, bitumen, petroleum coke, paraffin wax and other waxes which can be extracted from crude oil.

The oil is classified under six categories depending upon the various factors like boiling point, composition of the oil and use of the oil. These classes of fuel oil are termed as No. 1 fuel oil, No. 2 fuel oil and so on till No. 6 fuel oil. The first two categories of fuel oil are known as distillate fuel oils and the categories No. 4, 5, 6 are labeled as residual fuel oils. Commercially, No.1 fuel oil is called kerosene that is used in the domestic purposes of cooking and it is the most expensive type of fuel oil. No. 2 fuel oil is diesel, which is a bit more viscous than kerosene and slightly less expensive than kerosene. It provides road fuel on which number of vehicles run. No. 6 fuel is often called Bunker fuel as it is commonly used in ships and stored in bunkers. Viscosity and sulfur percentage in these categories increases with the increase in number. Centistrokes (cst) is the unit that measure how much viscous the product is and depending upon this factor, fuel oil is available in two varieties in the market i.e. 180 cst and 380 cst.

Crude oil is the major source of furnace oil. The furnace oil production in the world including distillate and residue oils is estimated around 2500 million metric tons for the year 2004-2005. Major crude oil producing countries are also the major fuel oil producing countries in the world. The consumption pattern of the world in context of fuel oil decreased gradually from 1995 till 2002 and has been relatively steady since then. The area wise consumption figures relating to fuel oil pertaining to the year 2005 are as follows

• North America (1389590 barrels per day)

• South and Central America (703570 barrels per day)

• Europe (1882080 barrels per day)

• Former Soviet Union  (699000 barrels per day)

• Middle East (1472720 barrels per day)

• Africa (477310 barrels per day)

• Asia Pacific (3526020 barrels per day)

Fuel oil is produced when crude oil that is extracted from under the earth’s crust goes through the distillation process. This process takes place in the oil refineries and distillation units located almost everywhere in the world. Conversion of crude oil to fuel oil involve the following chemical processes

• Atmospheric distillation

• Vacuum distillation

• Thermal cracking

• Catalytic cracking

The input to the production of fuel oil i.e. crude oil is produced by OPEC as well as non-OPEC nations. The leading producer country in context of crude oil is Saudi Arabia that comes under the OPEC group of nations.

In India, fuel oil is known and traded as furnace oil. India is blessed with ample natural resources and due to this reason, is known to be one of the fastest developing countries in the world. Furnace oil helps in the growth of the country’s industries as it powers the transportation network and forms the base of various Indian industries. The figures of production of furnace oil in India in the year 2003-04 hovered around 8.74 million metric tons. The public sector dominates the furnace oil production in the country and satisfies most of the domestic demand in the country.

India had a total consumption demand of around 8.03 million metric tons in context of furnace oil. The country has a large appetite for furnace oil that is used in the following industries serving the nations. The consumption figures in the following list pertains to the year 2002-03

• Transport sector (263000 tons)

• Shipping sector (135000 tons)

• Other transport (128000 tons)

• Food/plantation sector (376000 tons)

• Power sector (488000 tons)

• Miscellaneous services (1100000 tons)

• Fertilizer (445000 tons)

• Chemical and allied (1372000 tons)

• Textile (670000 tons)

• Iron and steel (574000 tons)

• Other industries (1653000 tons)

The country imports as well as exports some quantities of furnace oil. Though imports sum up to around 5-10% of the total consumption demand and were around 1.26 million tons in 2002-03, the import trend is on downfall. But on the other hand, an export of the commodity is rising steadily and in 2003-04, the export figures exceeded the import figures resulting in positive balance of trade in furnace oil. The furnace oil prices in India were regulated through Administered Price Mechanism (APM) since the year 1998 but after that period this phenomenon was decontrolled and oil companies were entitled to decide the prices of fuel oil on the basis of import parity.

Market influencing factors

• World demand and supply of crude oil

• Weather conditions

• Seasonal cycle

• Fluctuations in the value of dollar

• Stocks of fuel oil

• Price fluctuations

• Cost fluctuations

• Regional operating costs

• Competition in local markets

The major trading centers where fuel oil is traded are

• Singapore

• Shanghai Futures Exchange (SHFE)

Furnace oil is traded in the Indian commodity exchanges like Multi Commodity Exchange of India (MCX) and National Commodities and Derivatives Exchange of India (NCDEX).