VLSFO Prices Are At An All-time High – Politics Have Trumped Oil Fundamentals
Brent is close to $100/bbl – Around $12/bbl higher than expected
Last month we outlined all the fundamental reasons why Brent crude prices were justified in the $80 region and why prices were expected to fall to the $70s in the second half of this year (and that bunker prices would follow the trend). We ended the note with a brief caveat on the politics around Russia and around Iran; clearly the caveat has kicked in and geopolitics have come to the forefront and taken oil prices up another level, with Brent futures in the range of $96 – $99/bbl.
Source: Integr8 Fuels
The political and military developments in Russia/Ukraine, talk of an imminent invasion and the very recent
heightened tensions have pushed prices way above the expectations made a month ago.
Brent front month futures have been trading within a range of $96 – $99/bbl, and physical Brent has moved well above the ‘magical’ $100/bbl marker. It’s a reminder that fundamental analysis typically gives us the basis for price direction, but military and political threats trump the fundamentals.
High LNG prices boost conventional bunker demand, scrubbers stand to benefit
Less than two years ago countries across the world were closing their borders and locking down cities to stop the spread of Covid-19. Very few analysts could foresee crude oil going from below $20/bbl back then to almost touching the $100/bbl mark currently and gas prices staging an even more impressive comeback, from below $2/mmbtu in May 2020 for spot LNG in Northeast Asia to almost $50/mmbtu at the end of December 2021. While gas prices have retreated from their recent peaks, they remain very high historically. This is pushing owners of LNG carriers to burn cheaper conventional fuels adding to the growth in oil products demand. One “side effect” of such growth is more high sulphur fuel oil availability which widens the price spread between low and high sulphur marine fuels thus benefitting the scrubber tonnage.
LNG carriers increasingly burn conventional fuels
With high gas prices, LNG carriers are increasingly burning cheaper VLSFO and LSMGO and Integr8 Fuels have seen a growing number of such enquiries in recent months. Figure 1 (below) compares an index compiled by Integr8 Fuels showing an increase in the volume of conventional bunker fuels bought by LNG carriers with how this increase coincided with the rise in LNG prices. There was however a spike in buying interest around the start of 2020 despite low LNG prices, which can potentially be attributed to the IMO 2020 switch given the supply and price uncertainties at the time. The nature of LNG shipping is that gas tends to boil off at a certain rate during the voyage, so the majority of LNG carriers are built capable of burning this boil-off gas as bunkers, rather than releasing it into the atmosphere, along with conventional fuels.
Historically, most of the time LNG prices, adjusted for the energy content, stayed below conventional bunker fuel prices with the LNG carrier bunker fuel mix skewing sharply towards boil-off gas and only supplemented by conventional fuels depending on a number of commercial and operational factors. Figure 2 shows how LNG lost its price competitiveness to MGO (and thus to a greater extent VLSFO) resulting in LNG vessel operators minimising the use of boil-off (which has now more value as cargo) and increasing purchases of VLSFO and LSMGO.
