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Prices are high, daily volatility is high and European bunker prices are above Singapore

    VLSFO above $1,000/mt Just four weeks ago we wrote about Singapore VLSFO prices being at an all-time high of $765/mt. Since then, Singapore prices have hit $1,027/mt and Rotterdam prices have been even higher at $1,109/mt. The reasons are obvious and bunker prices clearly continue to move around developments and expectations surrounding the war in Ukraine. We can only look at the microcosm of our own markets within what are the more extreme, far-reaching and horrific events in Ukraine, but bunkers are a global market, with crude prices tending to underpin our sector. Since hitting more than $1,000/mt on March 9th, VLSFO prices have eased back on the prospects of weaker Chinese oil demand because of the recent surge in covid cases and major city lockdowns. The potential for higher oil supply and the release of strategic stocks from other countries has also taken some sting out of the market. However, the war in Ukraine continues and we are still facing huge challenges operating in such a volatile and uncertain market.   Source: Integr8 Fuels Read More

 

 

VLSFO above $1,000/mt

Just four weeks ago we wrote about Singapore VLSFO prices being at an all-time high of $765/mt. Since then, Singapore prices have hit $1,027/mt and Rotterdam prices have been even higher at $1,109/mt. The reasons are obvious and bunker prices clearly continue to move around developments and expectations surrounding the war in Ukraine.

We can only look at the microcosm of our own markets within what are the more extreme, far-reaching and horrific events in Ukraine, but bunkers are a global market, with crude prices tending to underpin our sector.

Since hitting more than $1,000/mt on March 9th, VLSFO prices have eased back on the prospects of weaker Chinese oil demand because of the recent surge in covid cases and major city lockdowns. The potential for higher oil supply and the release of strategic stocks from other countries has also taken some sting out of the market. However, the war in Ukraine continues and we are still facing huge challenges operating in such a volatile and uncertain market.

 

Source: Integr8 Fuels

 

Bunker prices have been moving by more than $50/mt within a day

Not only have buyers and sellers in the bunker market been faced with this huge rise in prices since the Russia invasion, but the volatility within each dayā€™s trading has been enormous. The graph below illustrates the price range and volatility in Brent front month futures each day since the beginning of February.

 

Source: Integr8 Fuels

 

Before the invasion, Brent futures were trading in the high $80s and the daily high/low spread was around $2/bbl. This was equivalent to a daily price volatility of around $13/mt on bunkers. Volatility has been a quantum leap higher since the invasion, with the average daily high/low range in the Brent market reaching $9/bbl, which is equivalent to a daily movement of close to $60/mt on bunkers! This is still the case and a real challenge – At its peak, Brent varied over a $20/bbl range in just one day (March 9th) and this was equivalent to some $150/mt in the bunker sector.

These developments have forced a shift in buying and selling bunkers, where prices may only be quoted on firm enquiries, validities on price quotes may only last a few minutes and all with much tighter credit terms in such a high price world.

Rotterdam bunker prices are now at, or above Singapore

Regional variations in price do take place and clearly the closer proximity of Western Europe to Ukraine and Russia has led to the unusual position of Rotterdam bunkers moving above Singapore quotes.

This position of Rotterdam at or above Singapore prices is new and could continue, based on heavy restrictions on Russian crude exports to Europe. This is likely to come either through current circumstances where companies are unwilling to take or deal in Russian cargoes or through more formal sanctions. Either way, Europe is the most vulnerable market to the loss in Russian oil supplies and this has pushed prices in Europe even higher than in other international markets.

Historically, VLSFO prices in Singapore have typically been $20-30/mt above Rotterdam. Towards the end of last year crude oil prices increased and VLSFO strengthened even further relative to crude, and this pushed the Singapore premium to Rotterdam out to $60/mt. The events in Ukraine have unwound all of this, with Singapore and Rotterdam VLSFO prices now in line.

 

Source: Integr8 Fuels

 

The swing in the HSFO price relationship is equally dramatic. Historically, Singapore HSFO has been around $10-20/mt above Rotterdam. This hiked to around $45/mt last year however, since the Russian invasion the relationship has completely reversed and Rotterdam prices are now above Singapore. So far this month Rotterdam HSFO has averaged $14/mt more than Singapore, with the current price relationship even more extreme and Rotterdam HSFO prices $35/mt above Singapore.

 

Source: Integr8 Fuels

 

All bunker markets are threatened, Europe is most exposed

These shifts in prices and price relationships are explained by the Russian invasion. At the end of last year Russia exported around 5 million b/d of crude and 2 million b/d of products, with two-thirds of these volumes going to Europe.

In the 5 million b/d Russian crude export market, around 3 million b/d went to Europe (via the Baltic Sea, Black Sea and Druzbha pipeline). The high dependence goes both ways, with the 3 million b/d of Russian crude going in to Europe accounting for one-third of all crude imports into the continent, stressing the current tightness in the European market. In comparison, Russian crude to the US only accounts for around 5% of their total imports, and Russian trade to Asia has been far less affected.

The same story is apparent for oil products, with the majority of Russian exports going to Europe, and Europe relying on Russia for almost 40% of all its total product import requirements.

 

Source: Integr8 Fuels

 

In fact, the Russian diesel/gasoil export market is also having a major impact on the Rotterdam market, with more Russian volumes going on shorter haul trades to Germany and Poland, with lower volumes getting further west into France, the UK and Rotterdam. In addition, the European refining system cannot easily make up for the shortfall in Russian diesel/gasoil either in upgrading capacity or the limited ability to use alternative crude supplies. The situation is likely to be exacerbated in the short term as European refiners go into their seasonal spring maintenance programs; even if some refiners can delay maintenance, this will not solve the European gasoil tightness.

Hence, Europeā€™s heavy reliance on Russian crude and products has had a major and disproportionate impact on relative bunker prices in Rotterdam, with price rises even greater than the steep increases seen in other international markets. It is very difficult to see a quick return to previous levels of Russian oil trade to Europe, and so this shift between European and Singapore bunker prices could be a continuing feature for now.

At the moment Russia is having to heavily discount its selling prices to get oil volumes sold and the chances are these volumes will end up in Asia. In the longer-term it will be the trading relationship between Russia and Europe, and any resulting shift in trading patterns that will determine if there is a structural change in the Rotterdam/Singapore price relationship. Global trade is a balancing factor and we will have to see what happens to European fuel oil flows to Asia and/or Middle East product exports and if these are pulled from eastern destinations to western destinations.

Other things are happening however, will take a ā€˜back seatā€™…

There are other factors influencing prices at the moment, including:

ā€¢ The major surge in covid cases in China (to a 2 year high) and the lockdowns in a number of major Chinese cities, including Shanghai;

ā€¢ The global negative impact on oil demand from much higher oil, energy, food and retail prices leading to much higher inflationary pressures and lower GDP figures;

ā€¢ How the global oil supply/demand picture may unfold, with lower demand expectations, lower supply volumes out of Russia and the OPEC+ group sticking to its current agreement and limiting any supply increase, despite very high prices;

ā€¢ What is happening in the possible easing in Iranian sanctions.

For now, the focus has to be on the situation in Ukraine and its outcome, and where international relations with Russia end up.

 

Steve Christy, Research Contributor
E: steve.christy@integr8fuels.com

 

 

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VLSFO Prices Are At An All-time High ā€“ 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 recentheightened 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 ā€˜magicalā€™ $100/bbl marker. Itā€™s a reminder that fundamental analysis typically gives us the basis for price direction, but military and political threats trump the fundamentals. Read More

 

 

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 ā€˜magicalā€™ $100/bbl marker. Itā€™s a reminder that fundamental analysis typically gives us the basis for price direction, but military and political threats trump the fundamentals.

VLSFO prices are at all-time highs – Around $80/mt more than expected

Crude sets the underlying price for all oil products, and bunker prices have moved in line with Brent. It means that VLSFO prices in Singapore have been quoted in the range $750 – $770/mt, which is at an all-time high; even higher than the early January 2020 ā€˜introductoryā€™ prices.

Singapore HSFO prices have also risen sharply, and averaged $520/mt so far this month, and at the time of writing are being quoted between $540 – $550/mt. You have to go back more than 7 years (to Oct 2014) to see higher prices; buying bunkers at the moment is an expensive business.

 

Source: Integr8 Fuels

 

The easy political analysis

Looking ahead, we are in the realms of the ā€˜known unknownsā€™; you donā€™t have to be much of a political analyst to suggest if Russia invades Ukraine, then oil and bunker prices are likely to go even higher and if an agreement or military withdrawal is reached then prices will go lower. In the big picture, we are now focused on the news briefings rather than the oil fundamentals.

Oil fundamentals still tell us something

However, it is still worth scratching below the surface of the fundamentals, just to see what responses the oil markets have come up with. Whether by design, or constraints, the short answer to this question is ā€™Nothingā€™. OPEC (and more recently OPEC+) has historically taken the role of managing oil prices, and $100/bbl crude has been seen as too high. At these levels we would have expected OPEC to boost oil production to take the ā€˜stingā€™ out of the market, but this hasnā€™t happened. In reality it is only Saudi Arabia, Kuwait and the UAE that are likely to have significant spare production capacity and able to boost output, with Iraq and Russia possibly also able to produce a bit more.

The current OPEC+ agreement is unwinding, but production increases are falling short of the planned expansion. In January it is estimated the group produced 0.9 million b/d less than the overall agreement. It seems a number of the OPEC+ countries cannot hit their targets because of ā€˜insufficientā€™ upstream spending and those countries with spare capacity are not willing to make up the production shortfall.

Itā€™s politics coming at us from all angles

This again, emphasises the political dilemmas; the US would want the Saudis to boost oil production to ease oil prices, but the Saudis are in what can be considered as a successful alliance with the OPEC+ countries, and this includes Russia.

Keeping with the political theme, and the assumption most economically powerful countries want lower oil prices, it begs the question if the US will work more aggressively to get an agreement with Iran and so potentially open up another 1 million b/d of crude supply. Indirect talks between the US and Iran (in Vienna) are reportedly in their final stages, although these ā€˜final stagesā€™ have been going on for some time. Iran is demanding that major sanctions
are lifted and legal assurances the US will not exit the deal again. A Washington comment is that this would be impossible, but the Russian/Ukraine situation is likely to give Iran a stronger negotiating stance.

Agreements are clearly a huge challenge at any time, but today the US is at the centre of two; Russia/Ukraine and the Iranian nuclear position. Even if there are solutions, there is also very often a political fall-out. With the US, Russia, China, Saudi Arabia and Iran all having a position, itā€™s going to take more of a political analyst to unravel any combination of alliances and discords between these five countries and what impacts they may, or may not have on oil prices.

Clearly an invasion of Ukraine is an extreme outcome and, bringing it down to our markets, prices would rise even further. However, a pull-back by Russia, and/or a successful summit between Russia and the US would obviously ease the situation and lower prices.

Letā€™s at least start with a ā€˜fundamentalā€™ price forecast

A whole range of price outlooks can be determined using various scenarios around different geopolitical outcomes, but as a starting point, the graph below illustrates a bunker price outlook based purely on an oil fundamental viewpoint. The general sentiment here is slightly firmer than a month ago, with a starting point of lower oil product stocks; demand prospects a bit strong and supply developments a bit weaker. We could take this as a base position
and increase the price forecasts depending on any perceived or actual political or military threats, wherever they may take place.

 

 

Source: Integr8 Fuels

 

At the moment, this price forecast would seem to set a floor. The conclusion this time round is the main price drivers are geopolitical, and the caveat is the relatively tight oil fundamentals.

 

 

Steve Christy, Research Contributor
E: steve.christy@integr8fuels.com

 

 

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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 ā€œside effectā€ 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.         Read More

 

 

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 ā€œside effectā€ 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.

 

 

 

 

 

 

On an MGO equivalent, LNG bunker prices in Singapore were up to $200/mt more expensive than MGO at the end of January. This price spread was as wide as $800/mt back in December before narrowing more recently. Elsewhere in the world LNG bunkers are even more expensive with Rotterdam and West Mediterranean quotes seen at a $50/mt and $450/mt premium to Singapore respectively.

All of this currently makes conventional bunkers an obvious choice for LNG carriers thus adding to global oil products demand growth.

LNG bunker switch contributes to global oil products demand growth

While gas prices are likely to ease off going into Q2 they are still expected to remain at much elevated levels historically. This means that the likelihood of a prolonged period of LNG carriers running on conventional fuels remains relatively high.

While the switch takes some demand off from LNG, it contributes to VLSFO and LSMGO demand. With the global LNG fleet of around 620 vessels and having taken out the vessels that can only burn conventional fuels, we applied fuel consumption, gasoil to fuel oil buying ratios, LNG to conventional fuels switch estimates and the differences in the energy content to come up with an approximation of how much extra oil products demand this switch can add (Figure 3).

 

Figure 3. Global gasoil (left) and fuel oil (right) demand growth position (Source: Wood Mackenzie,Ā  Integr8 Fuels)

 

Hypothetically and if sustained for a year, the LNG to conventional fuels switch could potentially add an extra 60,000 b/d to gasoil demand (through LSMGO) and 120,000 b/d to fuel oil demand (through VLSFO). In reality, gasoil demand additions should be somewhat higher and fuel oil lower as VLSFO in itself is a hybrid fuel. While the extra demand from the LNG to conventional fuels switch is likely to be just over 6% of the growth expected in 2022 for gasoil, it is much higher in the case of fuel oil.

Figure 4 (below) shows Singapore delivered LSMGO, VLSFO and HSFO prices relative to Brent crude oil. While the LSMGO to Brent spread increased to the levels last seen before Covid-19, the HSFO spread decreased to the lowest in four years, excluding the short period of time during the IMO2020 when it was slightly lower still. Higher gasoil demand results in a wider gasoil spread to Brent pushing refineries to increase production. While it is often possible to slightly adjust refinery configuration to yield more gasoil, the increase in its output often comes with processing more crude oil. This in turn results in a higher fuel oil output which weighs on HSFO prices.

By the end of January 2022, the spread between Singapore LSMGO and HSFO increased to $286/mt, up from $134/mt this time last year. The spread between VLSFO and HSFO, often called the Hi5 spread, has also increased from $118/mt to $168/mt. With the wider Hi5 spread, scrubber vessels stand to benefit. For example, scrubber fitted VLCCs have been earning almost double their non-scrubber fitted counterparts. This has helped prevent their owners from straying too far from breakeven levels.

Figure 5 (also below) shows that in the 4 weeks of January 2022 VLCCs with scrubbers had an earnings advantage of between $5,000/day and $6,000/day with only a handful of weeks back in early 2020 when a winder Hi5 spread resulted in larger scrubber premiums.

 

 

 

 

 

Where do we go fromĀ here?

Overall, while spot freight rates dropped, higher LNG prices pushed more LNG owners to increasingly burn conventional fuels adding to recovering gasoil and fuel oil demand. In the meantime, scrubber fitted vessels benefitted from the widening of the sulphur spread in bunkers.

While previously the global gas market had a stronger connection with oil, this link has been weaker recently. There are a number of factors that may affect both markets and the competitiveness of conventional fuels compared with LNG going forward. On one hand, unseasonably low gas inventories and the uncertainty surrounding the commissioning of a gas supply pipe from Russia to Germany provide support to gas prices. On the other hand, the expectation that OPEC and non-OPEC countries will continue increasing oil production may bring oil prices lower. If this is the case, we may continue to see interest from owners of LNG fleets to buy more conventional fuels than they normally do, particularly as the winter heating season in the Northern hemisphere is not just over yet.

 

Anton Shamray, Senior Research Analyst

E: anton.s@navig8group.com

 

 

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Not all price falls are equal ā€“ Certainly not in bunkers

    We thought it might take 6 months for crude to fall $10, but it only took a few days! Things tend happen a lot faster in the market than we typically expect, and the past month has definitely been one of those periods. In mid-November we wrote about prices easing over the next 3-6 months, based on the global oil market moving from what had been long-run stock draws, to expectations of long-run stock builds. So, in mid-November we were talking about Brent falling from the low $80s to the low $70s over the next 6 months; in reality we only had to wait 2 weeks!   Source: Integr8 Fuels   The new Omicron variant was first reported on 24th November and raised immediate concerns of another wave of travel restrictions (or even partial lockdowns) and potentially reversing what had been sustained increases in global oil demand. At the same time, the OPEC+ group stuck to their planned, phased increases in production. The fundamentals almost always win out, and this story is one of ā€˜surplusā€™ oil and much bigger stock builds than previously thought. Read More

 

 

We thought it might take 6 months for crude to fall $10, but it only took a few days!

Things tend happen a lot faster in the market than we typically expect, and the past month has definitely been one of those periods. In mid-November we wrote about prices easing over the next 3-6 months, based on the global oil market moving from what had been long-run stock draws, to expectations of long-run stock builds. So, in mid-November we were talking about Brent falling from the low $80s to the low $70s over the next 6 months; in reality we only had to wait 2 weeks!

 

Source: Integr8 Fuels

 

The new Omicron variant was first reported on 24th November and raised immediate concerns of another wave of travel restrictions (or even partial lockdowns) and potentially reversing what had been sustained increases in global oil demand. At the same time, the OPEC+ group stuck to their planned, phased increases in production. The fundamentals almost always win out, and this story is one of ā€˜surplusā€™ oil and much bigger stock builds than previously thought.

Brent futures prices fell by $13 In less a week, to below $70/bbl. There has been a bit of a subsequent rebound as OPEC+ hinted at a possible production cutback, even before their next scheduled monthly meeting, on January 4th. In addition, COVID concerns seem to have eased, with indications that vaccinations ā€˜can workā€™. However, current crude prices are still around $8/bbl lower than a month ago.

What has this meant for bunker prices?

Market prices for VLSFO and HSFO have reacted very differently over the past few months. VLSFO prices are strong, and premiums to Brent crude have recently hit 9-month highs, as VLSFO supply has been tight. This is because of:

  1. A ā€˜pullā€™ on refinery operations and components away from VLSFO and into the growing demand for other products;
  2. Strong winter demand for LSFO into the power generation sector, principally in Asia, but also taking place in Europe;
  3. A drop in LSFO imports into Singapore, from within Asia and also from the west.

All of this has resulted in very low stocks and a strong price premium for VLSFO. At the same time, HSFO supplies have increased as refinery throughputs have risen to meet the growing demand for other products. So, we have seen a tightness in VLSFO supplies and a complete contrast, of increasing volumes of HSFO, in line with increased refinery runs.

We have already highlighted the net $8/bbl drop in Brent over the past month, and the fundamental strength in VLSFO and weakness in HSFO. The outcome is that versus crude, the relative pricing of the two bunker grades have gone in completely opposite directions.

How big have these shifts in bunker prices been?

Using an index and taking October 1st prices as 100, VLSFO prices have been consistently higher than this starting point and are currently 7% higher than on October 1st; there has been no major collapse in VLSFO prices with the Omicron outbreak. Although Brent prices did move higher through October and November, there was an immediate collapse with the Omicron announcement, and although prices have rebounded since then, they are still 7% lower than at October 1st.

 

Source: Integr8 Fuels

For HSFO the market moves have been even more dramatic. Unlike for VLSFO and Brent, even through October and November HSFO prices were falling below their October 1st levels, and the Omicron outbreak only drove prices even lower. Like crude, there has been some recent recovery, but today HSFO prices are almost 15% lower than at the start of October.

So, VLSFO prices are now 7% higher than early October and HSFO near 15% lower; the spread between the two grades has clearly widened enormously over the past 10 weeks. The graph below shows Singapore bunker prices in absolute terms, with VLSFO moving up and then consistently hovering around the $600/mt mark, and HSFO prices falling from at or just above $500/mt, to at or just above $400/mt now.

 

Source: Integr8 Fuels

 

These fundamental drivers supporting VLSFO pricing and weakening HSFO prices have meant the differential between the two has moved from only $60 70/mt at the beginning of October to $175-200/mt this month.

 

Source: Integr8 Fuels

 

A wider VLSFO/HSFO differential means stronger scrubber economics

These shifts in pricing have clearly given a bigger advantage to those ships operating with scrubbers. There are a lot of variables involved in assessing the earnings uplift for scrubber fitted ships, but bunker prices are obviously a big one, followed by fuel consumption and the length of voyage.

Before the recent widening in the VLSFO/HSFO price differential, general indications were that the earnings uplift for representative tanker and dry bulk vessels fitted with scrubbers was around $1,000-3,000/day. Today those indications are almost three time greater and in the range $2,000-8,000/day, with the bigger figure for VLCCs and the smaller for Panamax dry bulk vessels.

 

Source: Integr8 Fuels

Focusing on the tanker market, this scrubber uplift is hugely significant because it raises current average earnings indications from only $2,000/day for a non-scrubber fitted VLCC to around $10,000/day for a scrubber fitted one (still extremely low, but not as low as $2,000/day!). In the dry bulk sector, the gains are likely to seen as less significant, as the uplift is smaller and the market much stronger, with non-scrubber fitted capesize earnings around $35,000/day and a scrubber-fitted one close to $40,000/day.

Will the VLSFO/HSFO differential remain this this wide

The general tendency is likely to be, if oil demand is rising and refinery margins are strong, then the VLSFO/HSFO differential is likely to remain relatively wide. In this case there will be continuing pressures on supplies into the VLSFO blend and HSFO availabilities are likely to be in ā€˜surplusā€™, with higher refinery throughputs. However, if oil demand is really threatened by the Omicron variant, then the pressures on VLSFO supply are likely to ease and ā€˜surplusā€™ HSFO availabilities are likely to be removed with lower refinery runs. It is one of those ā€œon the one hand this, and on the other hand thatā€ answers, but this is what will
drive the fundamentals over the coming months and we must look to the Omicron impact, government responses, along with refining margins and throughputs.

The sentiment at the moment seems to be that the Omicron variant will not have a huge impact on the markets. Also, Asian refiners are generally looking at taking their full entitlement of Middle East crude liftings in January, and this is despite an increase in official crude price formulas. So current market sentiment seems to suggest a wide VLSFO/ HSFO differential looks more likely over the near term.

Ending where we started, ā€˜things tend to happen a lot faster than we typically expectā€™.

 

 

Steve Christy, Research Contributor
E: steve.christy@integr8fuels.com

 

 

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Bunker buyers lose up to $5/mt for not covering enough suppliers

  With the Brent price recently touching the $80 mark and before the Omicron variant concerns pushed it lower, bunker prices reached levels not seen since early 2020. Following the OPEC+ decision not to release additional crude oil volumes on the market and continuing to add to existing supply gradually, we may see more oil price increases going forward, particularly if Omicron proves to be less deadly as initially thought and given the current tight oil supply and demand balance. The process of buying bunker fuel is essentially a reverse auction where more participants often mean a better price achieved, which is particularly important in the high oil price environment. In this article, we discuss the reasons and quantify the impact of low supplier coverage and response rate on the price paid and look into the ways to get more suppliers to quote. More suppliers quoting means lower price paidā€¦ We analysed a sample of over 250 Integr8 Fuels stems fixed so far in 2021 covering the hubs of ARA, Gibralter Straits and Malta which are served by multiple suppliers. For each stem, only the larger quantity fuel was analysed (often VLSFO or HSFO, unless a single LSMGO grade was procured) as supplier coverage in the dual fuel stems often depends on the main larger quantity grade. Figure 1. (below) shows the relationship between the supplier response rate (the share of suppliers quoting a price in the total number of suppliers) and the average premium or discount paid over the bunker benchmark price provided by ENGINE. It is evident that, on average, stems with less than 20% of suppliers quoting were fixed at a slight premium to the benchmark, while stems with over 60% of suppliers quoting were fixed at significant discounts, hence having more suppliersā€™ quotes resulted in an average savings of up to $5/mt. And there are a number of ways to achieve such savings. Left: Figure 1. Supplier response rate vs. price paid (Source: Integr8 Fuels, ENGINE)     To visually represent this, all the stems have been mapped for supplier coverage and response rate with stems falling into three distinct categories (Figure 2.). Around 30% of stems fall into the first category, where both supplier coverage and response rates were low, including most of the stems with one supplier. Stems in this category were on average fixed with a $0.2/mt discount to the ENGINE benchmark price. Intuitively, an over payment could be expected, however, the small discount was mostly due to a number of large quantity fixtures that usually attract good prices. Read More

 

With the Brent price recently touching the $80 mark and before the Omicron variant concerns pushed it lower, bunker prices reached levels not seen since early 2020. Following the OPEC+ decision not to release additional crude oil volumes on the market and continuing to add to existing supply gradually, we may see more oil price increases going forward, particularly if Omicron proves to be less deadly as initially thought and given the current tight oil supply and demand balance. The process of buying bunker fuel is essentially a reverse auction where more participants often mean a better price achieved, which is particularly important in the high oil price environment. In this article, we discuss the reasons and quantify the impact of low supplier coverage and response rate on the price paid and look into the ways to get more suppliers to quote.

More suppliers quoting means lower price paidā€¦

We analysed a sample of over 250 Integr8 Fuels stems fixed so far in 2021 covering the hubs of ARA, Gibralter Straits and Malta which are served by multiple suppliers. For each stem, only the larger quantity fuel was analysed (often VLSFO or HSFO, unless a single LSMGO grade was procured) as supplier coverage in the dual fuel stems often depends on the main larger quantity grade.

Figure 1. (below) shows the relationship between the supplier response rate (the share of suppliers quoting a price in the total number of suppliers) and the average premium or discount paid over the bunker benchmark price provided by ENGINE.

It is evident that, on average, stems with less than 20% of suppliers quoting were fixed at a slight premium to the benchmark, while stems with over 60% of suppliers quoting were fixed at significant discounts, hence having more suppliersā€™ quotes resulted in an average savings of up to $5/mt. And there are a number of ways to achieve such savings.

Left: Figure 1. Supplier response rate vs. price paid (Source: Integr8 Fuels, ENGINE)

 

 

To visually represent this, all the stems have been mapped for supplier coverage and response rate with stems falling into three distinct categories (Figure 2.). Around 30% of stems fall into the first category, where both supplier coverage and response rates were low, including most of the stems with one supplier. Stems in this category were on average fixed with a $0.2/mt discount to the ENGINE benchmark price. Intuitively, an over payment could be expected, however, the small discount was mostly due to a number of large quantity fixtures that usually attract good prices.

 

The stems in the second category, which constitute around 15% of all stems, had good a supplier coverage but a low response rate. These are characterised by their smaller size, shorter lead time and a small discount to the benchmark of $0.3/mt. A lot of these fixtures were done for same day delivery. Lastly, in the third category are the stems with a good supplier coverage and response rate – these on average achieved a much larger discount of $3.4/mt to the benchmark and this is the category where more fixtures should be aiming to be.

Left: Figure 2. Stems by supplier coverage and response rate. (Source: Integr8 Fuels)

 

Interestingly, we found a number of stems with the high supplier coverage and response rate yet with sizeable over-payments beyond the ENGINE benchmark pricing. The main reason for this was found to be the limitation imposed by some companies in the wake of the IMO2020 change on the acceptable levels of sulphur and viscosity when buying VLSFO. While in some instances such limitations helped to avoid buying
fuel that was more likely to test off-spec or cause issues on board vessels, in others this meant that some suppliers offering lower prices were being disqualified on the basis of provisional certificates of quality which were not always representative of the delivered fuel quality. A similar trend was spotted among the minority of stems where a certain spec was requested, for example, ISO 8217:2017.

Overall, the data shows that increasing the lead time and stem quantity, avoiding out of hours and weekend enquiries, being flexible with the fuel specs where operationally possible and safe to do so, can help increase suppliersā€™ response and achieve a better price paid. Moving beyond the stem sample analysed, another typical reason for sub-optimal supplier coverage is that some companies only prefer to deal with a limited
number of physical suppliers directly.

Traders can help increase supplier coverage

Direct business is often perceived as the only way to achieve low prices as it cuts the middleman from the equation. This does work well for large companies buying substantial volumes of bunkers globally who have the resources to negotiate prices, set up and maintain credit lines with the hundreds of suppliers globally. However, the reality is that a lot of medium and smaller companies may only be dealing with a handful of suppliers directly thus not covering the whole market. This significantly limits their bargaining power.

A trader can not only cover the rest of the market but also act as insurance policy should the companyā€™s own credit lines with suppliers become tight, particularly in the rising oil price environment.

Long gone the days when traders were matching sellers with buyers. In recent years, investment has been going into gathering data, setting up systems, news flow and analytics. While receiving quotes and sending back counteroffers to five suppliers may not sound too complex, a trader may have a system that allows to compare supplier quotations on the weighted by fuel grade average price while also considering suppliersā€™ historical claims, density short lifts, recent quality issues and fuel energy content.

These days a trader can not only cover every supplier in the market but also warn about supply delays (as no one wants their $40,000/day earning bulk carrier to go off hire waiting for bunker supplies), worsening weather conditions, help prevent claims, bundle up several enquiries to achieve volume discounts and even help with bunker planning, optimal port suggestions or combination of ports to bunker your vessel.

 

Anton Shamray, Senior Research Analyst
E: anton.s@navig8group.com

 

 

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VLSFO: Back To Where We Started on ā€˜Day 1ā€™ ā€“ Whatā€™s Next?

  VLSFO prices back above $600 When VLSFO was fully introduced in December 2019/ January 2020, Singapore prices were in the range $615-660/mt; so far in November have averaged $620/mt ā€“ we are back to where it all started!   Source: Integr8 Fuels   Events over the past 22 months are well documented and will be written about for many years to come. The oil industry will be a mere microcosm of all this, but when you are involved in the bunker market these oil industry details become significant. The collapse in oil demand at the start of the pandemic led VLSFO prices down to around $250/mt. The subsequent cutbacks in OPEC+ crude production, combined with the loss of US crude supplies and the eventual rebound in oil demand have all contributed to the rise in oil prices and the reason why VLSFO has moved back above $600/mt. The clear question is: Where do we go from here? Analysts foresee prices falling from here Some analysts are indicating that we are currently at a peak, and that prices will ease from here. Brent crude futures (front month) hit a high of above $86/bbl in late October and are currently trading around $82/bbl. The pointers now are towards $75/bbl in Q1 next year and $70/bbl by Q2. On this basis, it would imply Singapore VLSFO down from around $610/mt currently, to around $565/mt in Q1 and $530/mt by next June. Read More

 

VLSFO prices back above $600

When VLSFO was fully introduced in December 2019/ January 2020, Singapore prices were in the range $615-660/mt; so far in November have averaged $620/mt ā€“ we are back to where it all started!

 

Source: Integr8 Fuels

 

Events over the past 22 months are well documented and will be written about for many years to come. The oil industry will be a mere microcosm of all this, but when you are involved in the bunker market these oil industry details become significant. The collapse in oil demand at the start of the pandemic led VLSFO prices down to around $250/mt. The subsequent cutbacks in OPEC+ crude production, combined with the loss of US crude supplies and the eventual rebound in oil demand have all contributed to the rise in oil prices and the reason why VLSFO has moved back above $600/mt. The clear question is: Where do we go from here?

Analysts foresee prices falling from here

Some analysts are indicating that we are currently at a peak, and that prices will ease from here. Brent crude futures (front month) hit a high of above $86/bbl in late October and are currently trading around $82/bbl. The pointers now are towards $75/bbl in Q1 next year and $70/bbl by Q2. On this basis, it would imply Singapore VLSFO down from around $610/mt currently, to around $565/mt in Q1 and $530/mt by next June.

The fundamentals always ā€˜win outā€™

The recent price highs have come about as oil demand continues to
rebound and OPEC+ maintain their planned, and constrained increases
in production. Despite some pressure from the US on OPEC+ to go beyond this, there has been no shift in OPEC+ (nor Saudi) policy for countries with spare capacity to raise output in light of current prices.

This is despite some member countries producing below their allocated quotas because of previous low prices and a lack of spending in their upstream sectors. This rise in demand and constraints on supply has left oil stocks at low levels, and markets fundamentally tight. Also, although US crude production is rising in the wake of higher oil prices, the gains are considered relatively low, with a number of upstream companies ā€˜forcedā€™ to reduce debts or pay shareholder dividends rather than go out on a massive expansion in drilling activity.

The overall result has been that oil demand has exceeded oil supply so far this year, and we have been in an extended period of stockdraws, leaving the market tight and Brent prices well in to the $80s.

The expectations now are that oil supply will continue to increase, even under the current OPEC+ strategy. On the demand side, total consumption is now back close to pre-pandemic levels and so future gains are seen as far more modest, stalling at just above 99 million b/d through to the middle of next year.

 

Source: Integr8 Fuels

 

We are moving from a position of stockdraws to stockbuilds

This means we would shift from a global stockdraw averaging around 0.7 million b/d this year, to a stockbuild of 0.6 million b/d in the first half of next year. It is this anticipated shift in oil fundamentals that forms the backdrop to lower price forecasts through to the middle of next year.

 

Source: Integr8 Fuels

 

Subject to change – Here are some of the known unknowns:

In addition to this ā€˜baseā€™ position, there is also a possibility of developments and an agreement in the US-Iran nuclear talks, which resume at end November. The next 6 months may be too soon to see any material increase in oil supplies, but if sanctions on Iran are lifted, the expectations are that they could increase production and exports by 1.0- 1.5 million b/d. There are clearly a number of other variables that could affect this base case, not least with the pandemic (positive or negative), but also the extent of the northern hemisphere winter; any further demands on oil into power generation; what may happen to US production; and the OPEC+ strategy.

Finally, the economy, high prices and inflation can cause trigger responses, such as a reduction in oil demand and the release of strategic oil reserves (although the use of reserves usually has little long-term effect on oil prices). Any of these factors could lead to analysts changing their views.

Todayā€™s mood is bearish on price

Working within the base case, analysts are indicating Brent prices falling back down to around $70/bbl by the middle of next year, as stocks build and tightness eases.

 

Source: Integr8 Fuels

We have often outlined that the crude price largely sets the absolute
level of bunker prices, but with VLSFO and HSFO also having relative
strengthening or weaking positions against crude, driven by what is
happening in:

  • The refining sector with margins and maintenance;
  • Supply and demand developments for other oil products;
  • At extremes, even what is happening to natural gas prices (as highlighted in one of our reports last month).

In the first instance here, we have taken a fixed relationship with crude prices, to at least show the extend of bunker price movements based on analystsā€™ current expectations for Brent. In subsequent reports we will
return to looking at the relative shifts in bunker prices versus crude oil and other product prices.

From this, current bunker prices are seen as towards their highs and that some downwards movement is expected. In this case it shows bunker prices will ease back towards levels seen at during the first half of this year, with Singapore VLSFO in the low $500s by the middle of next year. This is around $100/mt lower than today. On the same basis, Singapore HSFO would be around $380/mt by mid-2022.

 

Source: Integr8 Fuels

 

The relative price of bunkers can easily shift, with any extreme cold weather ā€˜pullingā€™ more HSFO into power generation (such as in Pakistan, or in S. Kora/Japan) and giving relative strength to HSFO prices. Conversely, if global oil demand is stronger than forecast coming out of the northern hemisphere winter, we could expect higher refinery throughputs and more HSFO supplies, putting relative downwards pressure on HSFO prices. Typically, higher global oil demand would lead to a relative strengthening in VLSFO pricing (and vice versa). These are nuances around the underlying price of bunkers, but still important. By definition, things can change, but the sentiment today is one of weakening bunker prices in the near term.

 

Steve Christy, Research Contributor
E: steve.christy@integr8fuels.com

 

 

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What could the unstoppable environmental pressures mean for oil & especially the bunker market?

  Natural gas & LNG prices have spikedĀ & it has impacted on bunker prices In the past, we have highlighted the impacts on the bunker market from demand and pricing issues for other oil products, such as gasoline, diesel and jet. However, we have just seen a surprising, larger narrowing in the VLSFO/HSFO price differential due to what is happening in the natural gas and LNG markets. Although the VLSFO/HSFO differential has widened again in the past few days, we are not necessarily ā€˜out of the woodsā€™ and we have to extend the influences on supply and pricing in our markets in order to look at what is happening in the natural gas and LNG sectors. Until now, it may have seemed strange that a bunker report was focused on what is happening in natural gas and LNG, but gas prices hit record highs earlier this month and have caused shock waves in power generation and industry. As a result, oil, and in particular HSFO, has become an attractive economic alternative into power generation. To give some backdrop to this, we are just starting the northern hemisphere winter and there has already been a tightness in stocks and rising demand for natural gas/LNG as we continue coming out of the pandemic. The net result has been spot LNG prices spiked at record highs of $56 per million btu earlier in October; up from $6 in May, $10 in June and around $17 in September. Prices have since eased back to around $34 per million btu, but they are still at exceptionally high levels. Where-as spot LNG prices are up by almost 300% since July, monthly average crude prices are up by $9/bbl for Brent (plus 13%) and HSFO bunkers in Singapore up $87/mt (plus 21%). The graph below uses comparable scales on each axis and illustrates clearly the extent of the current price premium for LNG over oil. This explains why power generation companies with oil-fired capacity have come looking at ā€˜ourā€™ market to use oil to produce electricity. Read More

 

Natural gas & LNG prices have spikedĀ & it has impacted on bunker prices

In the past, we have highlighted the impacts on the bunker market from demand and pricing issues for other oil products, such as gasoline, diesel and jet. However, we have just seen a surprising, larger narrowing in the VLSFO/HSFO price differential due to what is happening in the natural gas and LNG markets. Although the VLSFO/HSFO differential has widened again in the past few days, we are not necessarily ā€˜out of the woodsā€™ and we have to extend the influences on supply and pricing in our markets in order to look at what is happening in the natural gas and LNG sectors.

Until now, it may have seemed strange that a bunker report was focused on what is happening in natural gas and LNG, but gas prices hit record highs earlier this month and have caused shock waves in power generation and industry. As a result, oil, and in particular HSFO, has become an attractive economic alternative into power generation.

To give some backdrop to this, we are just starting the northern hemisphere winter and there has already been a tightness in stocks and rising demand for natural gas/LNG as we continue coming out of the pandemic. The net result has been spot LNG prices spiked at record highs of $56 per million btu earlier in October; up from $6 in May, $10 in June and around $17 in September. Prices have since eased back to around $34 per million btu, but they are still at exceptionally high levels.

Where-as spot LNG prices are up by almost 300% since July, monthly average crude prices are up by $9/bbl for Brent (plus 13%) and HSFO bunkers in Singapore up $87/mt (plus 21%). The graph below uses comparable scales on each axis and illustrates clearly the extent of the current price premium for LNG over oil. This explains why power generation companies with oil-fired capacity have come looking at ā€˜ourā€™ market to use oil to produce electricity.

 

Source: Integr8 Fuels

 

Given the tight fundamentals in the natural gas (and coal) markets, this demand for oil in the power sector could hit at various times throughout the northern hemisphere winter, even if we see mild weather conditions. The current LNG forward curve suggests this, with prices above $30 per million btu right through to next March. There are forecasts of a colder winter, and if this is the case then demand on oil-ļ¬red power generation could be even greater.

New demand for HSFO into power generation

Although gasoil is part of the oil supply into power generation, especially in small, local back-up generators, big utilities have put out tenders for HSFO. For instance, Kuwait has already been in the market for 420,000 mt of HSFO in the third quarter and Pakistan was looking for 275,000 mt for November delivery (last November they were looking for 70,000 mt). There are wide ranging views of how much oil-ļ¬red power generation is available, but the vast majority of capacity is in Asia (Japan, Pakistan, Bangladesh and S. Korea) and the Middle East.

During this period when power utilities were buying oil, greater pricing pressures were on HSFO, rather than the 0.5% sulphur VLSFO. This is shown in the graph below, highlighting monthly average bunker price developments in Singapore HSFO and VLSFO since June (HSFO pricing is against the left axis with an axis range of $150/mt and VLSFO against the right-hand axis with the same $150/mt axis range).

 

 

Source: Integr8 Fuels

 

The emphasis in Singapore has been more on HSFO than VLSFO. The price of VLSFO largely tracked the increases in crude oil prices between July and mid-October, but the added demand for high sulphur fuel oil into power generation pushed the relative price of HSFO bunkers much higher.

Because the vast majority of oil-ļ¬red power generation buying is east of Suez, so the recent impact was focused on the Singapore bunker market rather than in the West. Over the three months to October, average HSFO bunker prices in Rotterdam have still risen by more than VLSFO, but the strains have not been as great as in Singapore. Summarising the July to October period, VLSFO was up by around $60/mt in both markets, whereas HSFO was up $70/mt in Rotterdam, and Singapore was the most extreme with HSFO up $87/mt.

 

 

Source: Integr8 Fuels

 

High gas prices did narrow the Singapore VLSFO/HSFO spread

The outcome of these pressures and price movements was an unexpected shift in the VLSFO/HSFO spread in Singapore. In earlier reports we have highlighted the impact of the pandemic and that demand losses in the bunker market have been far less than most other oil products (e.g. gasoline, diesel, gasoil and especially jet). With VLSFO typically a blended product, the weakness in demand and pricing for these other products and components meant VLSFO pricing was relatively weak. In contrast HSFO pricing was relatively strong against the rest of the oil barrel because of the ā€˜betterā€™ demand position and a huge cut in supply from much lower reļ¬nery throughputs.

These divergent trends in VLSFO and HSFO pricing last year led to the squeeze in their price differential, to only $60/mt in Singapore and close to $40/mt in Rotterdam. Expectations were always that as global oil demand increased coming out of the pandemic, this squeeze would be reversed; higher demand for gasoline, diesel/gasoil and components would strengthen their relative prices and also drive the price of VLSFO along with it. At the same time, there would be only minimal gains in HSFO demand and reļ¬neries would operate at much higher levels, increasing the availabilities of HSFO; so, the relative pricing for HSFO would become weaker. All this played out ā€˜as expectedā€™ from the back end of 2020 right through until early August this year; the VLSFO/HSFO spread doubled, to $110-120/mt in Singapore and to$100-110/mt in Rotterdam.

 

 

Source: Integr8 Fuels

 

Because of developments in natural gas/LNG pricing, all this started to change around mid-August. That was when power utility buyers entered the high sulphur fuel oil market and the VLSFO/HSFO spread ā€˜unexpectedlyā€™ narrowed again, to average $80/mt in September and get as low as $60/mt in early October. The impact in the West was nowhere as evident, with the VLSFO/HSFO spread still averaging more than $100/mt.

These developments are not permanent, but could be repeated

In the past few days, we have seen another dramatic change, with the VLSFO/HSFO spread widening again to more than$120/mt in Singapore. Some of the contributing reasons for this have been a build in Singapore stocks and lull in power utilities buying or putting out tenders for fuel oil, with for instance Pakistan stepping back from the market.

However, we are still only at the start of the northern hemisphere winter and these pressures in the market for natural gas/LNG are expected to last through to February/March. We could easily see power utilities entering the market again with another buying surge for HSFO east of Suez.

We have to watch the weather, the natural gas/LNG markets and the potential buying from oil-ļ¬red power utilities and if this takes place, we could expect another narrowing across the VLSFO/HSFO spread in Asia this winter.

As we come out of winter, demand for oil-ļ¬red power generation is expected to ease and any pricing pressures on HSFO removed. However, the squeeze we have just seen at an early stage in the northern hemisphere winter may not be a one-off. The pressures look as though they could be here for a number of years to come and if so, we could see more squeezes and seasonality in the Singapore VLSFO/HSFO spread.Ā 

 

Steve Christy, Research Contributor
E: steve.christy@integr8fuels.com

 

 

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What could the unstoppable environmental pressures mean for oil & especially the bunker market?

  The environment & COP 26 come back into focus Over the past 18 months all of the talk has been related to the pandemic, but worldwide politics is shifting and the environmental question is coming back into focus. The build-up to COP 26 starting on October 31st in Glasgow is likely to re-energise the debate. In this report we take an overview of the longer-term prospects for the oil markets and where this could leave the bunker sector in the run-up to political targets set for 2050; it is intended to be agnostic and an attempt to summarise current expectations over the much longer term. Oil demand forecast to continue growing for at least another 10 years The ļ¬rst headline is that after the collapse in demand last year, expectations are that the oil market will continue to grow for at least another 10 years, with a number of analysts generally pointing to peak oil demand being reached in the early to mid-2030s. A consensus view is that the political agenda, legislation, company strategies and personal choices will start to reverse growth in global oil demand from the mid-2030s onwards. The trajectory of decline is difļ¬cult to asses at this stage, and analysts have tended to set out various scenarios, but in the illustration here we show a decline that puts oil demand in 2050 just below the peak level seen in 2019 (and more-or-less at the same level as expected for this year). Read More

 

The environment & COP 26 come back into focus

Over the past 18 months all of the talk has been related to the pandemic, but worldwide politics is shifting and the environmental question is coming back into focus. The build-up to COP 26 starting on October 31st in Glasgow is likely to re-energise the debate. In this report we take an overview of the longer-term prospects for the oil markets and where this could leave the bunker sector in the run-up to political targets set for 2050; it is intended to be agnostic and an attempt to summarise current expectations over the much longer term.

Oil demand forecast to continue growing for at least another 10 years

The ļ¬rst headline is that after the collapse in demand last year, expectations are that the oil market will continue to grow for at least another 10 years, with a number of analysts generally pointing to peak oil demand being reached in the early to mid-2030s.

A consensus view is that the political agenda, legislation, company strategies and personal choices will start to reverse growth in global oil demand from the mid-2030s onwards. The trajectory of decline is difļ¬cult to asses at this stage, and analysts have tended to set out various scenarios, but in the illustration here we show a decline that puts oil demand in 2050 just below the peak level seen in 2019 (and more-or-less at the same level as expected for this year).

 

 

Though environmental measures will hit oil & bunker demand

The oil market is huge, and structural changes take a long time; for example, most of the gasoline and diesel cars coming out of showrooms today will still be around in the early 2030s and fossil-fuelled ships from the yards will still be operating in the 2040s. However, during the 2040s almost all new cars sales are expected to be electric vehicles (EVs), along with a number of new electric commercial vehicles, leading to the reverse from a growth oil industry to a declining one. This is hugely signiļ¬cant and why companies are adapting (or will be forced to adapt) to this new ā€˜more environmentalā€™ world, including the shipping and bunker sectors.

Different regions will be ā€˜hitā€™ at different times; Europe ļ¬rst?

The ā€˜helicopter viewā€™ of the global market shows this rise and fall through to 2050, but governments, economies and regions will all trend at a different pace. Generalising on Europe as a whole, this is a well-established, ā€˜low growthā€™ economy and structurally easier to achieve a reduction in oil demand; oil demand in Europe could fall by around 2 million b/d between 2019 and 2035 (close to a 15% drop).

The shift in the US administration is now expected to support greater environmental moves, and here oil demand is also expected to fall through to 2035, although at a lower rate of around 5%.

However, in all other regions oil demand is expected to continue growing, with economic developments outweighing the environmental shifts over the next 10-15 years. The obvious ā€˜power-houseā€™ behind the oil markets in this period is Asia-Paciļ¬c.

 

 

Ultimately oil demand is expected to decline

It is the long-term nature of structural changes in the oil sector that means the big, global shift in demand is more likely to start in the mid-2030s and accelerate through the 2040s. Changes in environmental regulations, consumer demands and company responses take time; existing legislation, decisions from COP 26 (and further down the line) are only likely to be seen on a global scale some 15-20 years from today.

It is in this longer time frame that all the big changes are likely to take place. European demand is expected to fall even further (down by around 20% over 2035-50), but the US market could see an even bigger structural change (down 30%), and signiļ¬cantly, demand in the Asian economies could be reversed and start to fall (by around 10% between 2035-50) as environmental developments overtake drivers from economic expansion.

 

 

 

Oil demand in some regions is still forecast to grow in this longer-term period, but the dominance of Asia-Paciļ¬c, the US and Europe all in ā€˜environmental modeā€™ would far outweigh developments in these other areas; oil demand globally would be in decline.

Impacts on demand for different oil products will also vary

So far, we have looked at overall oil demand globally and by region, but what about individual products, and speciļ¬cally demand in our sector, the bunker market?

Growth in oil demand over the next 10-15 years is focused on petrochemicals (naphtha and LPG) and transport fuels in Asia-Paciļ¬c (gasoline and jet). The general view is that demand for marine fuel oil will start to fall in the next few years and that requirements could be some 0.4 million b/d (25 million tons p.a.) lower by the mid-2030s, equivalent to a 10% drop.

 

 

 

 

This shift is not surprising given the current push towards greater efļ¬ciency in the shipping industry and the IMO mapping out legislation and indices for the measurement of carbon intensities. These are destined to come into effect in 2023 with the Energy Efļ¬ciency Existing Ship Index (EEXI), the Ship Energy Efļ¬ciency Management Plan (SEEMP) and the Carbon Intensity Index (CII).

There is talk and discussion around alternative fuels, but even in this longer time-frame to 2050 the mainstay of the shipping industry is still likely to rely on fossil fuels and so any environmental gains are most likely to be met by the lower use of fuel oil and gasoil (i.e. greater efļ¬ciency).

In the longer-term period to 2050, petrochemical demand is still forecast to grow (although there is obviously a huge debate here about plastics use). However, the structural change towards electric vehicles (EVs) is expected to ā€˜kick-inā€™, hence a reversal in gasoline and diesel demand, with global gasoline falling by around 7 million b/d (minus 25%) and diesel by 3 million b/d (minus 10%). Jet fuel demand is also expected to fall, with increased aircraft efļ¬ciency and the use of biofuels.

In our business, bunker demand is expected to continue falling throughout the longer term to 2050, but other parts of the oil market are likely to overtake ours in terms of radical shifts. Again, the size of the bunker is expected to fall with greater environmental efļ¬ciency gains, rather than any decline for international trade and movements.

 

 

What could this mean for the size of the bunker market?

There are various indications of the total size of the bunker market, but for these purposes it is estimated at around 275 million tons p.a. for all ships (5 million b/d). The IMO has recently published a lower ļ¬gure of 213 million tons p.a. for vessels above 5,000 GT in international trades.

With IMO legislation and strategies, plus political pressures from outside of our business and more stringent environmental requirements from the users of shipping, the demand on the shipping industry to hit environmental targets is clear.

Whilst there is talk of alternative fuels, ā€˜traditionalā€™ fossil fuels are still likely to dominate our sector by 2050. This means the industry will have to achieve much greater efļ¬ciency (slower steaming for older vessels in the near term and technological advances in the longer term?). The bottom line is the size of the bunker market will fall from a current estimate of around 275 million tons p.a. and could reach around 250 million tons by 2035 and 175-200 million tons by 2050; its still a big business, but not as big as today; down 10% by 2035 and another 25%between 2035 to 2050?

 

 

Itā€™s a long way out to forecast, but the environmental pressures are there

Summarising, this is a consensus case, where a number of higher and lower scenarios will also be valid. But it is always worth putting a ā€˜line in the sandā€™ and the discussions can move around this. Letā€™s see what the politicians and COP 26 come up with between now and November, and then the impact from the unstoppable moves towards a more environmentally acceptable path.

 

Steve Christy, Research Contributor
E: steve.christy@integr8fuels.com

 

 

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Sulphur Compliance & Enforcement

It was widely anticipated that IMO 2020 would bring significant challenges as to fuel quality and compliance with the new sulphur limit for VLSFO 0.50% Wt. not least due to the initial changes required for the infrastructure and because of the changing face of blends needed to achieve these lower limits.Ā      It therefore wasnā€™t too much of a surpriseĀ when a spike of claimsĀ occurred initially, these perhapsĀ due toĀ cross-over or cross contamination of High Sulphur and Very Low Sulphur Fuels.Ā      However, since then we have settled into a new normal whereby Sulphur Claims are worryingly still responsible for around 1 in 3 of every off- specification notice alleged for VLSFO.Ā      Current Statistics     Data availableĀ for the last 90 days suggests that the global average for VLSFO Sulphur Content is 0.46%Wt which on the face of it appears good news.Ā      Globally, when comparing thousands of lines of data, 97.5% of all VLSFOs tested at or below 0.50%Wt Sulphur during this time, 1.7% tested between 0.51 and 0.53%Wt Sulphur and 0.7% tested at orĀ  above 0.54%Wt SulphurĀ Ā      However, when we drill into this further and consider key bunker hubs it is very noticeable how some blending hubs perform much worse than others. For example 4.3% of Rotterdam fuels test between 0.51% and 0.53%Ā  and 1.9% of VLSFOā€™s at 0.54% or above.Ā      Singapore on the other hand, is seen to perform far better with less than 1% of all fuels testing above the 0.50% Sulphur limit which somewhat bucks the general trend that blend hubs are by far the highest risk areas for Sulphur Compliance. Read More

It was widely anticipated that IMO 2020 would bring significant challenges as to fuel quality and compliance with the new sulphur limit for VLSFO 0.50% Wt. not least due to the initial changes required for the infrastructure and because of the changing face of blends needed to achieve these lower limits.Ā 

 

 

It therefore wasnā€™t too much of a surpriseĀ when a spike of claimsĀ occurred initially, these perhapsĀ due toĀ cross-over or cross contamination of High Sulphur and Very Low Sulphur Fuels.Ā 

 

 

However, since then we have settled into a new normal whereby Sulphur Claims are worryingly still responsible for around 1 in 3 of every off- specification notice alleged for VLSFO.Ā 

 

 

Current Statistics

 

 

Data availableĀ for the last 90 days suggests that the global average for VLSFO Sulphur Content is 0.46%Wt which on the face of it appears good news.Ā 

 

 

Globally, when comparing thousands of lines of data, 97.5% of all VLSFOs tested at or below 0.50%Wt Sulphur during this time, 1.7% tested between 0.51 and 0.53%Wt Sulphur and 0.7% tested at orĀ  above 0.54%Wt SulphurĀ Ā 

 

 

However, when we drill into this further and consider key bunker hubs it is very noticeable how some blending hubs perform much worse than others. For example 4.3% of Rotterdam fuels test between 0.51% and 0.53%Ā  and 1.9% of VLSFOā€™s at 0.54% or above.Ā 

 

 

Singapore on the other hand, is seen to perform far better with less than 1% of all fuels testing above the 0.50% Sulphur limit which somewhat bucks the general trend that blend hubs are by far the highest risk areas for Sulphur Compliance.

 

 

 

 

 

Table 3 ā€“ Distribution of Sulphur Content by Supplier in Rotterdam LSMGO however is seen to perform far better over the same period with 99.4% of all samples testing at or below 0.10%Wt, 0.3%testing at 0.11%Wt Sulphur and 0.3% of samples testing 0.12% or above.

We can therefore conclude that we are likely to receive four times as many notiļ¬cations for Sulphur non- compliance for VLSFOs than MGOs and as a result it is essential that data driven purchasing is considered especially for VLSFOs.

Compliance

To refresh our memories let us ļ¬rst clarify what constitutes a non-compliance within Marpol Annex VI when it comes to Sulphur in bunker fuels.

For VLSFO, the Marpol Sample provided by the Supplier (& listed on the BDN) cannot exceed 0.50% Wt. Sulphur and they do not beneļ¬t from the tolerance (written around 95% conļ¬dence limits) that the vessel enjoys whereby the ā€˜In Useā€™ or ā€˜Onboard samplesā€™ are only non-compliant at the 0.54%Wt Sulphur level or above.

Similarly for MGO, the supplier cannot exceed 0.10%Wt Sulphur but the ā€˜in useā€™ or ā€˜onboardā€™ samples are only non-compliant at 0.12%Wt Sulphur or above.

Moreover, it is important to draw a clear line in the sand between the commercial samples as governed by the bunker contract and the Marpol sample placed onboard the vessel for regulatory purposes with regard their value in deļ¬ning compliance (or otherwise).

Simply put, commercial samples are not deļ¬ned in the Sulphur veriļ¬cation procedure within Appendix VI of Marpol Annex VI. Marpol Annex VI does not even mandate the testing of an ownerā€™s sample, only that a compliant BDN is placed onboard the vessel along with a Marpol Sample, this borne out by anecdotal evidence of owners requesting Sulphur is not reported on their quality reports due to the difļ¬culties that may arise as a result.

Enforcement

Sadly, the only consistent part of enforcement by Port State Control (PSC) is their inconsistent approach to non-compliance.

Examples of concern include Authorities treating a fuel as non-compliant based on a single in use sample testing within the tolerance levels at 0.51 or 0.52% or even debunkering being demanded basis an owner test marginally above 0.50%Sulphur.

This lack of clarity has been causing concern for some time but despite lobbying by IBIA within IMO we are still no closer to a consistent global approach as to the basis that PSCs determine that a fuel is non-Compliant as per Marpol Annex VI.

IBIA pushed to ensure a consistent approach to veriļ¬cation by implementing the amended Sulphur veriļ¬cation procedure (as adopted by MEPC 75) however this was rejected.

This is disappointing as these procedures cover the analysis of the Marpol sample to verify the fuel delivered to the vessel and the use of ā€˜in use or onboardā€™ samples to verify the fuel in use, this again incorporating 95% conļ¬dence
Therefore it remains possible that a black and white outcome still could be enforced onto a vessel despite the shades of grey basis the inherent errors of the test method itself and these concerns can only lend themselves to adjusting your buying strategies accordingly and trying to prevent these issues at source.

It is important therefore to use online platforms such as Engine where quality benchmarking gives us the best chance to navigate through this mineļ¬eld and allows our customers to sail on with fair winds and calm seas. So to conclude, whilst these inconsistencies remain it is imperative in to ensure that purchasing strategies incorporate port and supplier risk and benchmarking of suppliers and ports can save you a lot more than money, it can stop a claim spoiling your day?

 

Chris Turner, Manager – Bunker Quality & Claims
E: Chris.T@integr8fuels.com

 

 

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Additional costs can make bunker buyers pay more

In the previous articles we looked into how bunker buyers unknowingly pay more for the fuel bought, either by buying fuel with a low energy content or by suffering losses due to density short-lifts. However, the total cost of fuel is also influenced by the additional charges and fees, which vary significantly by port and often between suppliers in the same port. Additional costs are generally known at the point of enquiry however these are sometimes overlooked when planning or buying bunkers, resulting in overpayments. Additional fees can significantly add to stem cost A sample of over 6,000 stems globally covering the first half of 2021 has been analysed of which over 30% were found to contain some sort of additional fee. These fees typically include barging, port charges and dues, various taxes and surcharges, among others (Figure 1). On average, among the stems with additional fees the cost of the fuel itself contributes around 92% to the total stem value, however this varies dramatically by stem. Figure 1 - Additional fees broken down. Source: Integr8 Fuels Europe Ltd. Knowing where additional costs can hit hard is critical to buying bunkers competitively, particularly when it comes to the barging fees as these on average represent over 5% being by far the largest contributor of all non-fuel related costs. Depending on the port, barging fees are often charged on a tiered basis with the lumpsum charges for up to a certain quantity and a $/mt charge for the quantities above. In a number of ports in Americas different suppliers charge different barging fees (example New York), which makes it even more difficult for a bunker buyer to calculate the true cost of bunkers and compare suppliers between themselves. The problem is compounded by additional fees and taxes that are often chargeable as a percentage of the total stem value. Additional fees in the bunker industry ironically remind of the fee structure when ordering a takeaway delivery online. To what otherwise looks like a cheap meal one needs to pay extra for a side, the platform then charges delivery and service fees, and because demand is high it gives an option to pay extra for prioritised delivery. In the end, what initially looked like a good value lunch becomes a relatively expensive meal overall. Read More

In the previous articles we looked into how bunker buyers unknowingly pay more for the fuel bought, either by buying fuel with a low energy content or by suffering losses due to density short-lifts. However, the total cost of fuel is also influenced by the additional charges and fees, which vary significantly by port and often between suppliers in the same port. Additional costs are generally known at the point of enquiry however these are sometimes overlooked when planning or buying bunkers, resulting in overpayments.

Additional fees can significantly add to stem cost

A sample of over 6,000 stems globally covering the first half of 2021 has been analysed of which over 30% were found to contain some sort of additional fee.

These fees typically include barging, port charges and dues, various taxes and surcharges, among others (Figure 1). On average, among the stems with additional fees the cost of the fuel itself contributes around 92% to the total stem value, however this varies dramatically by stem.

Figure 1 – Additional fees broken down. Source: Integr8 Fuels Europe Ltd.

Knowing where additional costs can hit hard is critical to buying bunkers competitively, particularly when it comes to the barging fees as these on average represent over 5% being by far the largest contributor of all non-fuel related costs.

Depending on the port, barging fees are often charged on a tiered basis with the lumpsum charges for up to a certain quantity and a $/mt charge for the quantities above.

In a number of ports in Americas different suppliers charge different barging fees (example New York), which makes it even more difficult for a bunker buyer to calculate the true cost of bunkers and compare suppliers between themselves. The problem is compounded by additional fees and taxes that are often chargeable as a percentage of the total stem value.

Additional fees in the bunker industry ironically remind of the fee structure when ordering a takeaway delivery online. To what otherwise looks like a cheap meal one needs to pay extra for a side, the platform then charges delivery and service fees, and because demand is high it gives an option to pay extra for prioritised delivery. In the end, what initially looked like a good value lunch becomes a relatively expensive meal overall.

Watch out for extra fees in North America, Med and Red Sea

Similarly, in the bunker industry additional fees can easily make what looks like a competitive price quoted by a supplier into a rather expensive quotation overall, particularly when quotes from different ports are compared.

Figure 2. Key ports by prevalence of additional cost stems and proportion of such costs in average stem value. Source: Integr8 Fuels Europe Ltd.

Figure 2 shows the share of stems with additional costs in the key global ports as well as the share of additional costs in the average stem value. This may vary depending on the data sample given that additional costs often include a single lumpsum element which is less felt for larger quantity stems, however the map shown should still be representative.

On Figure 2, the green circles are for ports where less than one in three stems come with additional fees. Yellow circles are for ports where between one and two in three stems have additional fees applied, while in red ports additional fees are charged on most occasions. The larger the circle the higher the proportion of additional fees in a stem hence the larger red circles are of the most interest. These can typically be found in North and Central America as well as around Mediterranean and Red seas. Although some green ports have rather large circles meaning a small proportion of stems have high additional fees, these are mostly due to the smaller sized stems which are invariably charged for barging, while their larger quantity counterparts are not.

While some ports have red circles, these can also be due to the addition of the non-barging fees. Port fees and agent costs can often be packaged with the fuel (example Lisbon) and almost as often be paid as part of voyage expenses (example Gibraltar). These costs, however, apply in any case and can hardly be avoided although running a fair comparison by either including (preferably for bunker only calls) or excluding them is nevertheless important.

Detailed costs calculations are key

Figure 3 shows an example of bunker planning between Houston and Panama. Please note this example may not always be representative and depends on the market conditions, however the main point is to show the importance of calculating the total bunkering cost, including barging and other fees and how these may influence the end result.

Figure 3. Houston vs Panama bunker intake planning – Source: Integr8 Fuels Europe Ltd.

In the current market environment HSFO can often be found offered at competitive prices in Panama, often a few dollars below Houston, however assuming that both ports are priced equally buying 1,000mt of HSFO turns to be more expensive in Panama, given the additional fee structure whereby the owner will overpay just under $3,000 for the stem. This calculation does not include any agency fees for Panama or out of port charges in Houston.

However, due to the structure of the fees, Panama will not always be the expensive port of the two. Figure 4 (below) shows the sensitivity chart which illustrates that Panama is the cheaper port for quantities up to around 700mt and over 2,000mt.

Figure 4. Total paid difference between Houston and Panama on a HSFO stem. Source: Integr8 Fuels Europe Ltd.

While in this case the monetary difference may be relatively small, it can add up significantly over the course of a year or for a fleet of vessels. The differences can also vary if bunkering is considered in ports with a different structure of additional fees or with none fees overall ā€“ this could be for a voyage whereby Suez is compared with Malta or a voyage where Piraeus is competing with Istanbul, among others.

Overall, additional costs including barging can significantly alter the economics of buying fuel from a supplier or a port and taking this into account, together with calorific value, density short-lifts and overall fuel quality should yield a good benefit for the bunker buyer.

Anton Shamray, Senior Research Analyst
E: Anton.S@integr8fuels.com

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