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 ‘surplus’ 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 ‘can work’. 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 ‘pull’ 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 ‘surplus’, 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 ‘surplus’ HSFO availabilities are likely to be removed with lower refinery runs. It is one of those “on the one hand this, and on the other hand that” 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, ‘things tend to happen a lot faster than we typically expect’.

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

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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 paid…

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 suppliers’ 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 suppliers’ 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 company’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 suppliers’ 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 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 – 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 ‘win out’

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 ‘forced’ 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 ‘base’ 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.

Today’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 analysts’ 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 ‘pulling’ 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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Natural gas & LNG prices have spiked & 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 ‘out of the woods’ 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 ‘our’ 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-fired 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-fired 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-fired 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 ‘better’ demand position and a huge cut in supply from much lower refinery 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 refineries would operate at much higher levels, increasing the availabilities of HSFO; so, the relative pricing for HSFO would become weaker. All this played out ‘as expected’ 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 ‘unexpectedly’ 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-fired 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-fired 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. 

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

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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 first 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 difficult 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 significant and why companies are adapting (or will be forced to adapt) to this new ‘more environmental’ world, including the shipping and bunker sectors.

Different regions will be ‘hit’ at different times; Europe first?

The ‘helicopter view’ 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, ‘low growth’ 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 ‘power-house’ behind the oil markets in this period is Asia-Pacific.

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 significantly, 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-Pacific, the US and Europe all in ‘environmental mode’ 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 specifically 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-Pacific (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 efficiency 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 Efficiency Existing Ship Index (EEXI), the Ship Energy Efficiency 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 efficiency).

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 ‘kick-in’, 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 efficiency 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 efficiency 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 figure 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, ‘traditional’ fossil fuels are still likely to dominate our sector by 2050. This means the industry will have to achieve much greater efficiency (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?

It’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 ‘line in the sand’ and the discussions can move around this. Let’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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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. 

It therefore wasn’t too much of a surprise when a spike of claims occurred initially, these perhaps due to cross-over or cross contamination of High Sulphur and Very Low Sulphur Fuels. 

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. 

Current Statistics

Data available 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. 

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 or  above 0.54%Wt Sulphur  

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%  and 1.9% of VLSFO’s at 0.54% or above. 

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 – 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 notifications 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 first 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 benefit from the tolerance (written around 95% confidence limits) that the vessel enjoys whereby the ‘In Use’ or ‘Onboard samples’ 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 ‘in use’ or ‘onboard’ 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 defining compliance (or otherwise).

Simply put, commercial samples are not defined in the Sulphur verification procedure within Appendix VI of Marpol Annex VI. Marpol Annex VI does not even mandate the testing of an owner’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 difficulties 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 verification by implementing the amended Sulphur verification 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 ‘in use or onboard’ samples to verify the fuel in use, this again incorporating 95% confidence
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 minefield 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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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 – 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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High prices took a sharp dip last week; but it was only very brief

In our report a month ago we highlighted the bullish nature the oil market has adopted and through the first half of this month the average Brent crude price (front month futures) was at $75/bbl; its highest for almost 3 years. Throughout this period Brent traded in the $74-78/bbl range, but prices never stay the same, and at the start of last week there was a ‘wobble’ and we saw Brent fall by $5/bbl, to below $70/bbl (minus 7%)

This sharp drop came with ‘jitters’ in the financial markets surrounding higher Covid cases and at a time of a two-week delay in OPEC+ reaching an agreement from its early July meeting.

However, what is interesting is that the bearish signals were very short-lived, and prices have very quickly rebounded, with Brent back above $74/bbl; the underlying price sentiment is still supportive at these levels.

Bunker prices will trend with crude price movements, and the crude price drop last week led to VLSFO quotes in Rotterdam and Singapore falling by $25-30/ton (minus 4-5%). This was slightly less than the 7% fall in Brent prices, but the price tracking is clear.

Like crude, the drop in bunker prices was extremely brief and since then there has also been a rebound, with prices now back to where they were one and a half weeks ago.

OPEC+ has come up with a strong, price supportive agreement

In our report a month ago we highlighted the demand-led nature in the price recovery, and in particular the drive from the US. We then made some concluding comments on oil supply, with US oil production, Iranian sanctions and what the OPEC+ group will do.

Oil supply is an important feature of ongoing price determination, and this was clouded in the wake of initial disagreement at the July 1st-2nd OPEC+ meeting. At this session the UAE blocked any extension to the current agreement, wanting an increase in its’ baseline reference allocation. Things were resolved after two weeks, with 5 OPEC+ countries getting a higher reference allocation from next May and the end date of the agreement was extended from April 2022 to December 2022. On this basis there now appears to be a rigorous agreement in place, gradually phasing in a production increase of 0.4 million b/d per month through to April next year, and then further increases through to December 2022.

This ties in with OPEC’s general approach to the market, managing an underlying price (it is impossible to micro-manage an exact and consistent price). It also gives international markets the confidence of sufficient supplies to prevent prices surging and damaging economic growth; any damage to future economic growth will ultimately come back to lower oil demand and reduced requirements for OPEC crude. In fact, the Saudi oil minister stressed the importance of looking further ahead, and in this case to end 2022.

The graph below illustrates the extent of the major production cutbacks undertaken by the OPEC+ group and how the planned, managed return in output is expected to take place.

Within this, there may be issues that some OPEC+ countries are not able to get back to their pre-pandemic production levels because of deterioration in their upstream sector over the past 18 months. This could cause a potential spike in prices, and one analyst is still talking about $100 prices in the middle of next year. However, if this is the case, it is highly likely that OPEC will respond by using some of its’ spare production capacity to make up the shortfall in order to prevent any such extreme price spike.

This managed and gradual increase in OPEC+ production is now seen as supportive to oil prices. At the same time, anticipated increases in oil demand with successful vaccination programs will keep oil fundamentals ‘tight’. This is the general view in the market at the moment and is reflected in the leading forecasts of oil prices over the rest of this year and going into 2022.

Analysts see crude prices at, or above current levels for the rest of the year

Price dips like last week may be a continued feature of the market, with economic concerns being raised with any hint of increased lockdowns, negative news on Covid variants, or even delays to opening up. But as long as there is a visible path back to ‘normality’ with oil demand rising and OPEC+ managing, then it seems the underlying bullish nature in the market will continue.

Looking at a range of crude price forecasts over the rest of this year, the view is that prices will at least remain around current levels. The lowest forecasts for Brent crude through to end year are in the low $70s, with the higher forecasts some $10/bbl above this, in the low $80s. A number of forecasters then fall somewhere within this relatively narrow range.

The consensus view is that we are definitely well beyond low oil prices, and all the listed analysts’ price projections are considerably higher than we saw throughout 2019, before the pandemic hit. In fact, you have to go back to mid/late 2018 to see prices at similar levels to these forecasts.

What does this mean for bunker prices?

It is often ‘dangerous’ when there is such a close consensus on the outlook, but this does reflect current thinking and a relatively balanced world; lower covid numbers and a well-managed production profile going forward.

The question then is: what does this look like for bunker prices? With the end 2019 introduction of the VLSFO grade, there is not the same period of historical comparison, but if these crude price analysts are correct, it would mean VLSFO prices at least remaining close to current levels through to the end of the year, and a consensus view that prices could be slightly higher.

Singapore VLSFO prices are currently quoted around $535/ton, and based on the lower crude price outlook this would suggest Singapore VLSFO averaging around $525/ton in the 4th quarter this year. Taking the higher forecast of Brent at just above $80/bbl would imply Singapore VLSFO slightly above $600/ton in Q4; some $70/ton higher than today.

It then depends on how much you believe the forecasters. These groups only work with what they know and their view of the future based on today’s understandings. We have seen how rapidly new events can change things, but it is still important to understand what is happening in the market and what is driving prices in our business (and it also keeps forecasters employed).

Steve Christy
E: steve.christy@integr8fuels.com

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Around this time each month we tend to take a step back and look at the ‘bigger picture’ developments in the oil market. What happens here clearly underpins the price of bunkers.

The recent headline news in the oil market has been very bullish. In this report we look at why this is happening, draw some pointers for the future and see how bunker prices relate to this.

Brent now close to $76 and higher than just before the pandemic.

The recent hike in crude oil prices has pushed Brent front month futures close to $76/bbl, which is $6/bbl more than the January 2020 highs, just before the pandemic hit. The main drivers to this latest price rise are that oil demand is rising and expected to continue to recover, (especially in the US) and that headline stock levels are falling.

The graph below illustrates the phases where Brent crude prices have increased from their extreme lows in April last year (and how VLSFO prices have generally tracked this):

• Firstly, Brent up to and then remaining in the low $40s through
  to November;
• Then rising almost continuously to a peak of $70/bbl in early
  March;
• Followed by and easing and stuttering around $65/bbl for 2
  months;
• And now Brent moving well into the $70s in June.

Demand expectations in the big economies is pushing prices higher

In the report last month, we highlighted how the COVID impact on bunker demand has been far less than almost all other

As always, the market is responding a number of fundamental supply and demand factors, along with expectations and
sentiment. The current headlines centre on successful vaccination programs in the big economies, the easing in restrictions and the accompanying boost to oil demand (New York and California have both recently lifted restrictions).

These expectations are backed up by a number of analysts looking at a very positive view for oil demand increasing over the rest of this year (and into 2022). The chart below shows forecast growth in demand by country or main region from Q2 to Q4 this year and clearly emphasises the anticipated rises in the big economies of the US, India, Europe and China. The regions in this graph account for more 3 million b/d growth out of a World total just over 4 million b/d over this period; hence the significance and focus on these countries.

News on vaccination programs, easing in restrictions and Covid infections in these big economies will strongly influence market sentiment on prices.

US weekly stocks data add to the bullish sentiment

The recent very positive sentiment can be further backed up by looking at product stock levels. The problem here is that almost all data is at least 1-2 months delayed. The exception is in the US, where weekly data is published and does ‘grab’ the headline news. Although this is typically later revised with monthly data, the weekly stocks release (API on Tuesdays and EIA on Wednesdays) can have a huge influence on futures prices.

The graph below shows the published development in US gasoline, distillate and jet fuel stocks combined, covering 2019, 2020 and 2021 so far. Using 2019 as a reference position, it is clear the 2020 collapse in oil demand related to the pandemic meant oil stocks surged (not only in the US, but also globally).

However, more recently US product stocks have been running relatively close to 2019 levels, and way below the peaks seen this time last year. If the strong demand expectations in the US play out, then published stocks data is likely to remain ‘more balanced’ and so be price supportive; of course, the converse is also true. The weekly US stocks data is very often a contributing factor to price sentiment.

Crude prices have risen, but what about bunkers?

Combining these more recent bullish sentiments has pushed crude prices to above pre-pandemic levels and the following graph is a closer focus on what has happened over the past 8 weeks. There has been a near continuous rise in Brent crude prices towards $75/bbl over this period. However, although VLSFO prices generally moved with crude in May, this has not happened in June; VLSFO prices in Singapore have remained relatively flat whilst Brent has climbed another $4.50/bbl

In our report from late May we highlighted the possibilities that VLSFO prices are likely to weaken relative to crude as demand for other products rise. This could be the case here, with further increases in product demand in the big economies. However, these are subtleties, and crude prices will continue to generally underpin prices in our sector.

Demand has been the story, but supply will also become a feature

Looking ahead, market sentiment will be driven by the confidence in oil demand increases in the US, India, China, other Asian economies and also Europe; headline stories on infections, lockdowns and vaccinations are key to watch.

This report is a focus on the demand side issues that have led to the latest increase in crude prices, but in the outlook we also have to take oil supply into account. With crude prices getting back to above pre-pandemic levels, it can be argued that the OPEC+ agreement to cut production has worked well. At its height, this group removed around 5 million b/d supply from the market.

At their June 1st meeting, OPEC maintained the existing plan to raise production through to July, and a focus will now be on what decisions are taken at their July or possibly August meetings to raise output.

Apart from demand, the other factor for the group to consider is non-OPEC production and here only limited gains in output are expected over the remainder of this year. In fact, despite the recent sharp rise in oil prices, US production increases will take some time to come through.

Indications are that increases in cash flows are going more towards debt reduction rather than any big rise in drilling activity. As a result, total oil output in the US is forecast to remain fairly flat for most of the rest of this year. Also, the US/Iran negotiations on a nuclear agreement and the lifting of sanctions are expected to go on for longer, pushing back any immediate large-scale increase in Iranian crude exports to the market.

Looking at the demand and supply fundamentals, there is significant room for OPEC+ to implement increases in production over the rest of this year, as long as demand increases are in line with general expectations.

Also, OPEC has traditionally managed prices not going ‘too high’, so as not to kill off economic growth and subsequent increases in oil demand. Hence, the internal pressures to raise output and the political direction not to let oil prices escalate too ‘excessively’, gives the OPEC+ group the perfect platform to continue raising output.

Demand could hit record highs next year, but prices….

Many forecasters are raising their price expectations for this year, with a general target of Brent in the $70s. Some people are even talking about $100 crude oil prices, and these comments often grab the headlines. Never say “never”, but if prices remain around current levels, the OPEC+ group will raise output and supplies will increase over the rest of this year. On a final note, behind all of this, demand for oil is still rising, and global consumption is forecast to exceed 100 million b/d later next year and even reach record highs by the end of the year. Concluding, almost everything here is relatively bullish; we keep watching the demand factors, what OPEC+ does and Iran to see how things actually pan out.

Steve Christy
E: steve.christy@integr8fuels.com

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Recent Price Movements: A divergence between crude & bunkers

In mid-April we looked at the ‘bigger picture’ developments in the oil market and highlighted the key drivers that are likely to influence the absolute price of oil (and how bunker prices fitted into this). In this report we dig a bit deeper, looking at what is happening to the price of bunkers in relation to crude and other main oil products; are there differences and are we back to ‘normal’ yet?

Current crude oil prices are $2/bbl higher than in mid-April (equivalent to $15/ton), but conversely VLSFO prices in Singapore and Fujairah are more than $10/ton lower. Singapore VLSFO prices tended to track crude price movements through the second half of April and early May, but over the past 3 weeks there has been a big divergence. Brent crude is currently towards the high of the recent $66-69/bbl range, but VLSFO prices East of Suez are now in a much lower trading range than in mid-April, at around $485/ton.

Reiterating what is happening to demand by product

In the report last month, we highlighted how the COVID impact on bunker demand has been far less than almost all other products; especially against the jet market as a proportion of its overall size (which has been hardest hit of all), and for gasoline in volume terms.

The graph below illustrates how hard demand volumes have been hit in each main sector, and clearly shows the extreme demand impacts on gasoline, gasoil/diesel and jet and how well ‘protected’ the fuel oil market was; there was only a minimal drop in fuel oil demand between April 2019 and April 2020 levels.

However, after demand for these other products collapsed in early 2020, the pattern has been reversed and demand has rebounded over the past 12 months, albeit on a stuttering and regional basis. Because bunker demand was least affected, so there is no major, overall rebound in our market.

The underlying global position now is that there is growing support for other products, and expectations are that this will continue. This then helps support crude prices and higher refinery throughputs.

Based on the demand rebound over the past 12 months, it would seem that a lot of the re-balancing has already taken place, but there are still some more demand gains to be seen in other products over the coming 12 months. This would suggest pricing relationships between bunkers and other products have already made a major move back to pre-pandemic ‘normality’, but we could see some further movements over the next year.

Singapore VLSFO prices relative to jet have fallen to their lowest levels

For bunkers, future relationships are not necessarily going back to their pre-pandemic ‘norms’. VLSFO had only just started to be mass-marketed a few months before the pandemic hit.

Also, going forward, high sulphur fuel oil may be weaker against most other products than the historical ‘norms’, because of the large-scale switch out of this product with IMO 2020.

However, looking at the relative price of bunkers versus the jet market, the premise that we have already seen a major revision is borne out. In Singapore, VLSFO peaked at 40% above jet prices at the outset of the pandemic (on a weight basis). During the second half of last year VLSFO and jet were priced more-or-less the same, but over the past month this relationship has eased and VLSFO is now at its weakest relative position to jet, at around 87% of the price. This ties in with the demand picture outlined above, and as jet demand increases over the next 12 months, this price relationship may well weaken further.

The trend has been similar for HSFO against jet prices. In ‘normal’ times before the pandemic, HSFO was priced at around 65% of jet. The unprecedented pandemic condition meant that HSFO and jet prices were briefly the same! Again, the situation has eased and fallen more sharply over the past month. Current relative prices put HSFO back to the 2019 levels versus jet, at around 65%. However, the specification and demand changes in the bunker market may mean HSFO continues to weaken on an underlying basis against jet.

Singapore VLSFO is also at relative lows versus other products

These relative bunker price movements have not been isolated just to the jet market. The graph on the next page illustrates Singapore VLSFO prices against other local cargo product prices and shows the relative price of VLSFO falling across the barrel.

Current VLSFO prices relative to other product prices in Singapore are now at their lowest since the large-scale introduction at end 2019

Bunker prices relative to crude incorporate most of the key factors

All of these individual product issues are wrapped up in the crude price, and it is no surprise that bunker prices relative to crude have followed a very similar pattern to those outlined above. VLSFO and HSFO prices in Singapore have fallen further relative to Brent over the past month. Whereas VLSFO hit a peak of 20-40% above crude in Q1 2020, and then traded at a 0-10% premium to crude over the past year, it is only this month that the VLSFO price has fallen to a slight discount to Brent. In the same way, relative HSFO prices have also dipped more recently.

If oil demand does continue to rise, as most analysts are forecasting, then underlying bunker prices relative to the rest of the barrel, and ultimately to crude, could ease further.

Big-picture factors will determine absolute oil prices, but there are nuances and relative bunker prices could weaken further

Ultimately, the crude oil price will reflect the various market dynamics across the barrel, along with refinery issues and
developments, political and covid uncertainties, plus an input of market psychology. The ‘bigger picture’ market issues outlined in the mid-April report still hold true, plus a few others to consider:

• The demand rebound across all products, including air passenger flights;
• Oil supply developments and the OPEC+ strategy;
• COVID developments, and in particular what is happening in India;
• Progress or not in the Iran/US talks on a nuclear deal and the lifting of sanctions;
• Refinery margins and output;
• Outcomes from the recent Chinese tax hike.

So, a lot of the relative price readjustment for bunkers may have already been accomplished in the past month, but given the demand dynamics already outlined in this report, bunker prices could still continue to weaken relative to jet, other products and crude over the next 12 months.

Steve Christy
E: steve.christy@integr8fuels.com

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