Bunker price spreads in 2020

Bunker price spreads in 2020
Bunker price spreads in 2020
Friday May 24, 2019

Approximately a year ago, bunker price swaps pointed to a large spread between the price of low and high sulphur fuels in 2020. Now not so much.


The scarcity premium

Tracking forward markets over time offers a window into how price expectations develop. This time last year concerns over scarcity of low sul-phur fuels in 2020 were prevalent, contributing to a strong premium on marine gasoil (MGO) 2020 swaps contracts vs. high sulphur fuel oil (HSFO). These concerns came to a head in early 2018 when Singapore MGO swaps traded at a $348/t premium to HSFO - up from $240/t a year earlier.

Part of the problem was that the shipping industry would err on the side of caution when it came to 0.5% sulphur blends. A perception that low sulphur blends would pose compatibility issues for ship’s engines meant that straight MGO use was likely to be high in the early months of the regulation, despite pricing at a premium to 0.5% sulphur fuels.

The price of bunkers of course moves with changes in the price of crude oil. But the sulphur premium has narrowed since last October.

On the one hand, the scarcity premium the market was paying for MGO has dissipated. Maybe ‘blend-compatibility’ fears have eased importantly as early adopters have experiencing few problems.

 As a result of MGO premium to crude oil in Cal 2020 futures market has dropped by around $20/t in the past year. By contrast, over the same peri-od the forward price of HSFO has risen relative to crude (though to a lesser extent relative to in-creasingly scarce heavy sour crudes).
 
Last year (Q3) the market was expecting a substantial glut of HSFO to coincide with the 2020 sulphur cap, but since then -

• Refineries have made efforts to shift yield away from HSFO towards middle distil-lates.

• The crude slate has become lighter as US production (and other mostly-Atlantic pro-ducers of sweet light crude) growth outpac-es that of heavier crude producers who have either voluntarily (Saudi Arabia, Rus-sia etc.) or involuntarily (Iran and Venezue-la) cut production. A lighter crude slate pro-duces less middle and heavy ends.

• Rising prices of heavy sour crudes relative to lighter crudes has increased the relative price of high sulphur fuel oil.

• Scrubber adoption (future demand for HSFO) has been higher than we expected 12 months ago.

 

VLSFO pricing

Lately we worked on the basis that future VLSFO prices could be derived from a ration of 85% MGO and 15% HSFO. Over the past few months, liquidity in the VLSFO forward contract has increased, particularly for Q1 2020 (when the market expects the high/low sulphur spreads to be widest). VLSFO prices for Q1 2020 are cur-rently around $20/t lower than our 85:15 blend would suggest, putting implied premium of VLSFO to HSFO at $197/t - some $120/t lower than a year ago.

Regional HSFO pricing

In bunker ports outside the global hubs, this premium is likely to be squeezed further.

Bunker companies that currently fill barges with MGO or HSFO will require an incentive to dedicate tanks to HSFO to serve the ~10% of the world’s ships that have fitted scrubbers. Low local competition level  will most probably guide suppliers to charge above hub-port HSFO prices.

This is less of an issue for the larger ships that make up the majority of the scrubbered fleet. They will regularly call at bunkering hubs when HSFO supply is competitive. Whereas Smaller scrubber-fitted ships will need to regularly pass these hubs to avoid eroding thinner savings. But even owners of these vessels could make a return on their investment with careful planning and support from charterers.


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