Prior to IMO 2020 there was a lot of conjecture mingled with a fair spattering of trepidation as to the perceived level of quality issues we would see with many stakeholders suggesting significant problems were on the horizon using analogies of our old foe 1% Sulphur LSFO and the relatively recent Houston problem among others.

Overview

As it happened and as widely reported many of these gloomy predictions did not come to pass, Q1 2020 passed with all stakeholders relatively unscathed despite the new world of a patchwork quilt of VLSFO qualities. Things have changed more recently however with ARA being thrust into the spotlight as a result of high TSPs and an increase in the prevalence of Estonian Shale Oil in VLSFO blends.

Circumstances of high TSP of course allow the buyer to lodge a claim against the seller given the value exceeds a maximum contractual guarantee however what has become apparent is an increasing frequency of fuels that appear on specification to Table 2 parameters of ISO 8217 yet have been alleged to have caused fuel management related issues as well as equipment component damage.

Curiously still,many of these fuels when examined forensically have been found not to contain any sinister contaminants and do not correlate with a “problem” fuel according to testing experts.

Food for thought

It would of course be remiss of us to not acknowledge that problem fuels do exist and can result in difficulties or damage onboard vessels, however it is important to make the point that without adequate precautions even an on specification VLSFO has the potential to cause damage.

This is nothing new, indeed HSFO routinely contained 30 to 60mg/kg of Aluminium and Silicon (cat fines). Even these levels of abrasive catfines would have to be removed to below 15mg/kg by purification and of course if this was not efficient or effective then harmful particles could reach the engine resulting in catastrophic damage to cylinder liners etc.

Indeed whilst catfines are generally lower in VLSFOs almost a quarter of all VLSFOs however in Singapore for example still have catfines of greater than 40mg/kg and still require extensive purification.

This should not be too difficult a task given the lower density and viscosity of VLSFOs when comparing to HSFO but it is vital to remember that purifiers still need to be set up correctly considering the pour point of the fuel as well as its density and viscosity.

It is also entirely possible that the reason for a chocked purifier may be as a result of mixing with previous ROB, not in the storage tank – as this is hardly ever noted these days – but in the settling tank itself.

VLSFO’s also require to be injected at the correct viscosity, generally speaking most OEMs require a viscosity of 12cSt at the engine inlet. Indeed it may be that in extreme cases of low viscosity that this may not be possible to achieve without a cooler being employed or without being in close proximity of the pour point if it is waxy.

Finally, an increasingly new and important area of focus is engine lubrication and an increase in engine wear which may result should this not be optimized to the new fuels.

Prior to IMO 2020 It was well publicized that as an Industry we would have to move to a lower Base Number (BN) Cylinder Lubrication Oils (CLOs) given prolonged running on 0.5% Sulphur fuels however what appears to have developed is a pattern of vessels sufferingmajor engine damage since switching to VLSFO despite also all switching to BN 40 CLOs and all fuels meeting the ISO 8217 specification.

Evidence has been published of red tinged piston tops and abrasion as a results of calcium deposits which have not been removed due to the reduced detergency of BN 40 CLO’s.

Indeed you could argue that some of these issues were foreseen as early as March 2018 when MAN indeed recommended the introduction of Cermet (Chromium) coated piston rings at next overhaul given their experiences with ULSFOs. MAN have also issued a number of service letters in recent months describing the benefits including providing a “seizure resistant surface against the liner.. avoiding micro seizures and lowering scuffing risks”

Conclusion

Therefore all things considered, whilst it is absolutely prudent to put the fuel supplier on notice of alleged damage at the earliest opportunity so as to avoid the robust time bar clauses in the bunker contract we must not lose sight of the fact that these issues may well be as a result of other factors rather than the fuel itself.

It is therefore important to go into every investigation with an open mind, work on fact and not assumption, collate and document evidence which would survive robust cross examination and more importantly do so in a transparent manner.

Chris Turner Global Manager for Quality and Claims
P: +65 6622 0042
E: chris.t@integr8fuels.com

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There has been a lot of peering into the rear-view mirror in recent months as to IMO 2020 but what has remained constant has been the continuing spectre of Bunker Delivery Notes being found to be inaccurate or non-compliant.

In this article we will address the main issues we have found in our trading experience, the key implications and, of course, some advice on how to prevent this from affecting our bunker procurement.

The Problem

You could debate long and hard as to the reasonings why these vital documents often don’t stand up to scrutiny, the lack of regulation of suppliers at PSC level in many ports, the lack of awareness across stakeholders and worse still, a worrying lack of knowledge with respect to what fuel is actually being delivered – all of which may manifest into serious issues and losses for the end user.

Firstly with regard compliance to Marpol Annex VI , the latest amendments to Appendix V has been in place for well over a year and yet there remain examples where formats have not been updated to meet the new requirements and even when this has occurred it is frequently noted that neither the barge or vessel crew appear able to ensure the BDN is completed correctly by ticking the correct box or something as simple ensuring a Marpol sample seal is documented.

We must assume that enforcement will gather speed once COVID19 restrictions ease and as a result incomplete and non compliant BDNs will undoubtedly cause owners issues in the coming months, particularly if they have not raised the issue at the time by means of an LOP and reported deviations to flag state.

Secondly the accuracy of data within BDNs continues to result in technical and commercial challenges and at worse losses. Indeed just at the time the industry is crying out for data transparency we have as much opacity as ever.

What data shows

For example, a recent study by Integr8 fuels covering over 10,000 samples suggested that hotspots exist when it comes to BDN inaccuracies. Density in VLSFOs for example in Hong Kong is routinely found to be 2% higher on average than the owners analysis. Under current market conditions this can easily account for $7 to $9 and in extreme cases a quite eye watering $18 to $20 per tonne which as a buyer cannot be ignored when comparing prices across ports and suppliers.

Inaccurate Densities can also result in intake issues onboard vessels with miscalculations entirely possible with larger stems resulting in at best a less than stemmed delivery or at worse the possibility of a tank overfill.

It has also been well published in recent months that other key parameters of VLSFOs are very different to that of HSFO. Viscosity for example is averaging less than 100cSt but from time to time we still see an arbitrary 380cSt recorded on the BDN. This can result in conventional purifiers not being set up correctly resulting in a loss of efficiency during purification and possibly damage to equipment onboard as a result.

Indeed Pour Point, one of the key variables in VLSFO is only routinely recorded on BDNs in Singapore. This is particularly important given the paraffinic nature of VLSFO and the need to maintain a fuel at least 10
deg C above its pour point.

Absent owners test results we recommend the fuel is maintained onboard at the delivery temperature until such time it can be confirmed.

Finally we cannot underestimate the need to request Certificates of Quality prior to delivery and cross compare against BDN data. The vessels crew are the first line of defence and if tasked correctly can be a very effective one.

Conclusion

In closing we cannot underestimate the need to request Certificates of Quality prior to delivery and cross compare against BDN data. The vessels crew are the first line of defence and if tasked correctly can be a very effective one.

However in order for the crew to do this we have to collectively give them the tools to complete the job, namely training and awareness.

From the buying perspective the issues highlighted only go to reinforce the need to use data to buy smartly in this highly challenging and complex environment.

Chris Turner Global Manager for Quality and Claims
P: +65 6622 0042
E: chris.t@integr8fuels.com

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This year so far has been full of events which have affected many global markets, including the bunker market. While the spread of Covid-19 reduced crude oil demand, the production cuts changed not only the supply of crude oil but also its composition.

As a result and driven by the changes in pricing, some refiners started to purchase more light crude yielding little residual output, which goes into HSFO and VLSFO production. Bunker prices have already reacted, particularly in ARA, where the HSFO and VLSFO discount to other ports seems to be narrowing giving suppliers in other locations a chance to compete on the price.

OPEC+ cuts affecting fuel oil supply

Crude oil demand fell sharply on the back of the Covid-19 lockdowns and prices followed, at some point down to low teens.

For many oil producing states such low prices were a major blow to the budget so to rescue the situation the OPEC+ countries cut production with the majority of these cuts being for medium and heavy crudes, rich in fuel oil.

Elsewhere, medium and heavy crude oil production fell naturally, while the production of light crude dropped less significantly changing the global crude oil composition. Crude oil prices reacted accordingly.

A good example is Russian URALS (which is a medium grade) that is now selling to North West Europe (NWE) at a significant premium over Brent (Figure 1).

Paying more for crude affects refining margins, so some refiners in North West Europe started to purchase more light crude from the US and West Africa and subsequently produce less fuel oil.

Fuel oil bunker discount narrowing in ARA

The shortage of fuel oil is already visible in bunker pricing in ARA and in an increase in imports. While Russia remains the main supplier into the region, a number of rare fuel oil cargoes are expected to arrive from the Americas.

The tight fuel oil supply is affecting ARA bunker prices, particularly for HSFO which have recently increased and are now at parity with the other hubs (Figure 2) .

While HSFO constitutes a small proportion of the global bunker demand, there is evidence that VLSFO prices are also affected, although to a smaller extent.

The reason for VLSFO being less affected is that generally it is a blended product meaning many different streams go into production. These could be residual, distillate and others. However, when residual components become relatively more expensive, some producers may start looking for cheaper alternatives with the potential impact on quality and an increase in off-specs.

The ARA fuel oil tightness also means owners may have to pay more in relative terms for their bunkers. Figure 3 (below) shows the narrowing discount for residual bunker fuels in ARA compared with some other and often competing ports.

The HSFO discount to Gibraltar and Las Palmas more than halved between May and early July. The VLSFO discount has also declined.

The table shows the average prices which do not reflect the variance between suppliers meaning that should this trend continue, there is a higher likelihood of suppliers elsewhere potentially able to offer competitive prices vs. ARA.

Previously, for vessels going to a port in ARA the bunker buyer would not normally consider bunkering elsewhere (unless for operational reasons), however currently we recommend checking the price in alternative ports.

Fuel oil tightness expected to reverse longer-term

While it is possible that the current fuel oil tightness lasts for a number of months, the expectation is that it may reverse afterwards. As OPEC+ is expected to gradually reduce the crude oil cuts pushing more medium and heavy crudes to the market, the US light crude oil production may see further declines given the sharp contraction in new oil well drilling.

Therefore, it is likely that in the near term fuel oil tightness may occur in other locations, just like it is happening in ARA, so keeping an eye on pricing and being open-minded about where to bunker can save shipowners money.

Anton Shamray Senior Research Analyst
P: +44 207 467 5856
E: anton.s@integr8fuels.com

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We are now around 4 months into this global pandemic, and in the analysts’ world ideas about oil demand and how it may rebound are converging. In mid-April we did a webinar reflecting the wide range in expectations of the collapse in global oil demand and how quickly it may recover. At that time views varied from a ‘minimal’ loss of 15 million b/d in April (versus April 2019) up to an extreme case of a 28 million b/d loss. Also, the perception back then was that oil demand would recover back to 2019 levels by the end of this year.

Now, ten weeks later, a number of analysts are more aligned on a demand loss of around 21 million b/d (mid-way between the early indicators), but the impact is now expected to last much longer. Most analysts are now suggesting oil demand will not return to 2019 levels until early 2022. So, the impact is not as deep as some first feared, but it is expected to go on for longer.

The graph below illustrates this, showing the latest views from a number of analysts on how they see the loss in oil demand developing after the extreme position in April (each month represents the loss versus the corresponding month in 2019). Three of the four analysts’ forecasts are relatively similar, with one more extreme on the downside. Averaging the four gives a pattern where demand is rebounding, but still slightly below 2019 levels even by end 2021.

When we look at the bunker business, the demand impact on us been relatively minor, at around 9% loss in fuel oil demand. It has been the other transportation sectors that have taken the big hit, and especially the jet market, where two-thirds of the demand has been lost. However, it is not the bunker market that determines bunker prices, it is the overall oil fundamental backdrop that largely determines the absolute price and we are going through one of the most extreme oil markets ever seen.

Price does tell us a lot, and we have seen VLSFO in Singapore fall from $740/ton at the start of the year to a low of $190 in late April and back up to around $320 today. The shape of this curve mirrors the oil fundamentals; collapse as demand falls much faster than supply and rebound as demand picks up and supply is cut.

The ‘worst’ is over and oil fundamentals are now tightening; demand is rebounding fast as countries come out of lockdowns, and production has fallen with the OPEC+ cuts along with loses in output from low oil prices (most notably in the US). The question is, where do prices go from here?

The chart below illustrates the massive supply and demand shifts we have already gone through, and also shows a fundamental case going forward. This is based on the average demand view discussed above and two supply cases, one where OPEC+ fully adhere to the current agreement and the other where ties to the agreement slip. Any slippage could be for a number of reasons, but the two main ones are likely to be either a breakdown between Russia and Saudi Arabia (which underpins the agreement), or that at some stage the oil price becomes ‘acceptable’ to the OPEC+ group and they feel comfortable easing the cuts. Looking at analysts’ current views, full adherence would appear to result in supply running considerably below demand for the rest of this year and throughout 2021. This would be highly price supportive and we could expect bunker prices on an upwards trajectory. Any slippage in the OPEC+ agreement would lower the price prospects, and in the case shown here the supply and demand outlook is relatively balanced; i.e. stocks would remain close to current levels and we would not expect a significant price rise.

OPEC has typically been a very good organisation at responding to crises, and along with other key countries the initial agreement in mid-April and the extension in early June has turned the market around.

There is the framework for this OPEC+ agreement to run through to April 2022, and IF the analysts are right on oil demand AND OPEC+ stick to the current plan, then we could see oil stocks fall rapidly from now onwards. The graph below shows how global oil stocks have increased relative to the position at January 1st 2019 (the blue line) and that we are currently close to 2 billion barrels above this level. It also shows a continual decline from now on.

It will still take until late Q4 2021 / Q1 2022 until we get back close to the 2019 stock levels, when Brent crude prices averaged $65/bbl and indications for Singapore VLSFO were around $550/ton. Nonetheless, this is a clear road to this point and could see Brent well above $50/bbl by the end of this year and around $60/bbl later next year.

Full OPEC+ adherence does imply much stronger prices than the current crude forward curve indicates and would signal Singapore VLSFO knocking on the door of $400 at the end of this year and moving towards $500 in late 2021.

There is of course a lot of conjecture here, and this obviously depends on the key factors of how we come out of lockdowns and the state of the economy, plus what OPEC+ actually does, but we do have to keep watching these developments to see where pricing in our sector is going. This approach gives an idea on what track we are on and if, or how far we may be deviating from this $400/ton and $500/ton VLSFO price trajectory. Let’s keep tracking and we will continue to post regular updates.

Steve Christy Strategic Communications Director
P: +44 7803 201 149
E: stevechristy@navig8group.com

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For a number of months the world has been dealing with the Covid-19 pandemic. Despite this, shipping has on average only seen modest declines in activity and the bunkering industry continued to develop with new production and supply locations appearing on the map.

While for many the lockdown has given an opportunity to appreciate the simple things, like being with family and enjoying the slower pace of life, one thing that is often missed is the ability to travel, particularly somewhere sunny for vitamin D and drinks on the beach.

Luckily, for those who miss the action of the bunker industry while on holiday, many locations offer a complimentary bunker barge or two patiently waiting on the horizon. Here are our top 5 bunkering locations West to East that could be of interest to the bunker buyer both in the office and on a holiday.

Offshore Trinidad and Tobago

A convenient, although a relatively expensive location for vessels going towards USG or in the opposite direction is offshore Trinidad and Tobago. Figure 1 shows that owners recently paid a premium of $20-60/mt to the regional hubs

Except local demand, vessels on longer-haul voyages that are low on bunkers can utilise this convenient option before continuing their voyage.

Those who holiday in Trinidad, which also produces one of the hottest chillies in the world, can visit Pitch Lake, the largest natural deposit of asphalt and a popular tourist spot, the size of 80 football pitches holding 10 millions tons of asphalt.

The English Channel

With another barge added to this region recently, the English Channel is gaining weight as a bunker supply location with Portland, Falmouth and the South Falls Head anchorage being the key areas.

While unlikely to fully compete with ARA on the price and with the challenging weather at times, these locations still play an important role in the regional bunker supply, often used by the vessels with low LSMGO going into the ECA or when voyage orders change.

With more suppliers present, the long-term premium of $20-50/mt to ARA may start getting reduced, increasing the attractiveness of the English Chanel locations for bunkering.

Those going on a holiday around the South of England will find it hard to resist the temptation of ordering the classic dish of fish and chips in a family pub in a small coastal village after travel restrictions are lifted.

Kali Limenes

A small and less known location tucked in the middle of East Mediterranean on the beautiful island of Crete, stocking VLSFO and LSMGO.

Figure 4 shows that Kali Limenes is not for those on a tight budget but can be helpful if a non-scrubber vessel critically needs bunkers or is heading towards the Suez Canal, which does not offer VLSFO yet.

The beauty of this location is that bunkering takes you right down to the beach. With the crystal clear water and a tasty combo of souvlaki and a cold drink at the end of the day, is this Mediterranean paradise not worth paying the bunker premium for?

Port Louis

Moving slightly further east and south is Port Louis in Mauritius, which sits nicely on one of the busiest shipping lanes between East and West. It is known to have saved a number of owners from switching their vessels to wind power when Singapore VLSFO earlier this year was fully booked for weeks ahead.

This option expectedly comes with a high price tag (Figure 6), not least because of the logistics of bringing the bunker fuel from Fujairah or South Africa.

Just like Mark Twain wrote “Heaven was copied after Mauritius”, no picture can fully describe the beauty of this island.

Hambantota

Appearing recently on the news, Hambantota is developed as a port and a new bunker location in Sri Lanka. Just like Port Louis it is located on a busy shipping lane between East and West. The first bunker cargo was reportedly imported in early April, although no further development appears to have happened since.

No wonder the project may have faced delays in the current environment but hopefully it will see further development soon.

As a holiday location Hambantota is known for Walawe River (Figure 7) and Kumana National Park safari. With the pandemic hopefully over soon, these could be excellent places for your next getaway.

Anton Shamray Senior Research Analyst
P: +44 207 4675 856
E: anton.s@integr8fuels.com

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The absolute level and structure of oil prices has changed massively over the past month. We have moved from a position where prices were falling fast and the extent of contango was huge to one now where prices have risen and the contango almost disappeared.

In terms of the bunker market, VLSFO prices in Singapore fell from a high of $740/ton at the start of the year to a low of $190/ton in late April. On the 1st June, Singapore quoted prices hit $285/ton and VLSFO prices elsewhere have followed the same trend.

The underlying explanation is simple, in January to April we saw total oil demand collapse and oil production rise. This all reversed in May and June, with oil demand rising as lockdowns begin to ease and at the same time production was falling as OPEC+ cutbacks kicked in. Still, the recent price rise is only a fraction of the price collapse.

Clearly, the absolute price move has been the headline news and the key factor, but it is also worth looking at what has happened to bunker prices as part of the overall oil barrel. The impact of Covid-19 on demand in our sector has been far less than in the jet, gasoline and diesel markets. This is shown in demand estimates, where the jet market has fallen by around 70% compared with the bunker market down by only around 10%.

For these reasons, price relationships have gone to extremes. As an illustration, before the covid-19 pandemic VLSFO prices were around 81-87% of the jet fuel price (in NW Europe); at the height of the demand collapse VLSFO prices were at a 15% premium to jet fuel. Now demand is picking up as lockdowns ease, so this relationship has returned to more ‘normal’ conditions, with VLSFO back to a 13% discount to jet.

Summing up, prices are up from their floors and price relationships are returning to-wards more ‘normal’ levels, but there doesn’t look to be a ‘quick fix’ to get prices any-where near where they were at the start of the year. If prices ever do get back close to these levels its likely to be a long, drawn out process going through at least into next year.

At the moment all eyes are on the OPEC+ meeting, with indications the May/June quotas will be rolled over into the third quarter (either as a whole or reviewed on a rolling monthly basis). Current futures prices have factored this in already and so confirmation of a rollover may see limited price gains, but failure will see a price drop. As discussed in some of our other recent Integr8 notes, it is these overall supply developments alongside how quickly demand rebounds that will determine absolute price levels going forward and these factors will not be really influenced by the bunker market.

The planned OPEC+ meetings are scheduled for the 9th and 10th of June, although there has been some speculation that these could be brought forward to this week. Either way, we will publish a note on the outcome to see where pricing could be going.

Steve Christy Strategic Communications Director
P: +44 7803 201 149
E: stevechristy@navig8group.com

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The key factors that are worth considering when buying bunker fuel are quality, availability and price. Excluding quality, availability and the relative price paid generally tend to correlate with the lead time, which is the difference between the enquiry/stem date and the start of the delivery window.

Following the IMO2020 transition, longer lead times have become key to securing bunker fuel while paying a competitive price. Shipowners who delay stemming risk non-availability and having to burn a more expensive compliant fuel instead. Book too early and potentially face cancellation costs or delays.

Comparing the lead time then and now

Lead time used to be somewhat less important prior to the IMO2020 switch, with plentiful HSFO availability globally. In most cases, the ability to stem HSFO as and when required meant that many stems were booked close to delivery.

Figure 1 shows the progression of the average lead time for HSFO and VLSFO, which started to increase mid-2019 and has now stabilised at a much higher level of around 8.5 days, up from 5 to 6 days in the previous years.

While HSFO is still relatively tight, VLSFO lead time may potentially start to decrease in the current well supplied market. And there is a human element too.

Some operators and buyers at times may have potentially faced non-availability earlier this year so buying strategies were adjusted to accommodate for longer lead times. Some of them would continue to habitually stem early despite the changing market dynamics so the industry may not get back to the shorter lead times seen previously.

With the change in the average lead time, the distribution by the lead time bracket has also changed. Having analysed over 5,000 stems, Figure 2 compares the shares of Integr8 Fuels HSFO and VLSFO stems by lead time in Jan-May 2019 and Jan-May 2020 respectively.

In Jan-May 2019, around 1 in 4 HSFO stems were booked two or less days in advance. With VLSFO only 1 in 6 stems are booked with such a short lead time.

The shape of the HSFO distribution was clearly skewed towards shorter lead times with few bookings over 9 days in advance. The VLSFO distribution is more even and, with 1 in 3 stems booked over 9 days in advance, there is a clear trend towards longer lead times.

Getting the lead time right

Getting the lead time right is very important. Short lead times risk non-availability or a relatively expensive price paid. While some may argue long lead times are always beneficial, these are also associated with risks.

One of these risks is the change in voyage orders, with vessels trading on the spot being particularly vulnerable. Should the destination port change, where bunkering has already been arranged, the owner risks racking up cancellation fees, unless a change of supply port has been agreed with the supplier where possible or the market moved up since fixing.

The other risk lies in facing unexpected bunkering delays due to congestion or bad weather, particularly for bunker-only calls. Both are very hard to predict over a week ahead and such delays can be very costly. Lastly, the vessel itself may arrive late at the bunkering port causing delays in bunker supply.

With all the benefits and risks in mind, based on the continuous market monitoring and the thousands of stems concluded, Integr8 Fuels currently estimate the optimal lead time on average of at least 6 days where possible for VLSFO and slightly longer for HSFO. Distillate only bookings can generally be concluded with much shorter lead times without any issues.

While the optimal lead time varies by vessel type, port and fuel, continuously monitoring these changes is now more important than ever given the new market realities and the many associated risks that can have an impact on PnL.

Anton Shamray Senior Research Analyst
P: +44 207 4675 856
E: anton.s@integr8fuels.com

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For decades Singapore has been the gateway to Asia, a major hub offering bunkering as well as other various shipping services. There have been a number of attempts to rival it, particularly when it comes to bunkering, however bunker sales in Singapore remain strong, at around 50 million tons per annum out of the global total of 300 million tons.

Recently, however, certain developments in China and particularly around Zhoushan mean, while unlikely to fully rival Singapore, it may become an attractive bunkering alternative for some.

China as an importer of fuel oil

For a long time China imported fuel oil to help meet its domestic consumption, including bunker sales and as a feed for the secondary refinery units. The consumption as well as the sales tax were applicable on all bunker sales, and given that the majority of fuel oil was imported from Singapore, this was evident in the premium at which bunker fuel was priced in China.

Figure 1 shows the Zhoushan HSFO price premium to Singapore. Zhoushan has the share of around 30% of all bunker deliveries in China.

For the most of 2018 the premium held at around $10-15/mt, widening significantly in 2019 due to a number of factors.

However, this is now changing as the Chinese government has a vision of creating a bunkering and a service hub in the port of Zhoushan.

Certain steps towards achieving this goal have already been made and the market has reacted accordingly.

Creating a bunker and service hub

In an attempt to promote Zhoushan as a bunker and service hub, a free trade zone was established in 2017. This helped reduce the customs clearance time to avoid delays in supplying vessels.

Further to this in July 2018, a country-wide tax incentive was introduced for marine fuel blending using imported feedstocks. Zhoushan benefited the most as, unlike many other Chinese ports, it boasts substantial storage and blending capacity and there is more under construction. Access to storage was one of the key factors which enabled Singapore to develop as a large bunkering hub.

This, however, was still not enough to encourage Chinese refiners and blenders, who had the capacity but no favourable regulatory framework, to produce more marine fuel to cover domestic and potentially foreign demand.

In February 2020 tax rebates started to apply in China for the sale of marine fuels, increasing the regional competitiveness of domestically produced fuels. Major Chinese refiners announced plans to ramp up VLSFO production amounting to over 20 million tons of VLSFO production in 2020, in line with the annual Chinese domestic and bonded bunker demand.

Zhoushan is increasingly becoming the key port for bunker-only calls in China, where they plan to sell 7 million tons of bonded fuel via 11 suppliers in 2020, up from 3.6 million tons in 2018. Such an increase brings Zhoushan closer to Rotterdam and Fujairah by volume.

These developments pushed the price of VLSFO in Zhoushan lower (Figure 2), raising its competitiveness against other regional ports, including Singapore.

With the introduction of tax rebates and increased local production, average monthly VLSFO prices in Zhoushan moved from over $20/mt above Singapore early this year to a discount more recently. This trend is likely to continue as 10 million tons of VLSFO quotas for bonded sales have just been released; an extra 5 million tons may be issued later this year, potentially replacing imports.

Zhoushan bunker sales growing

There is already a solid base for the increased Chinese VLSFO production and sales from Zhoushan, supporting the government intention to create a vessel service hub. This is already visible as bunker enquiries and sales are up.

As an example, Figure 3 shows the cumulative growth in the number of stems Integr8 Fuels concluded in Zhoushan.

The Zhoushan growth has also been due to the favourable calling fee policies. With two bunker anchorages, inner and outer, the outer anchorage is free of fees, which makes it similar to Singapore OPL. The inner anchorage charges half of the pilotage fee for bunker-only calls and none if the outer anchorage is unavailable due to bad weather, although other taxes may still apply.

It is understood that the first foreign-flagged vessel was supplied with VLSFO at the Zhoushan outer anchorage in mid-December and many more vessels have followed since.

All these developments increase the attractiveness of Zhoushan as a bunker and vessel services port. There have already been reports of vessels, previously used to bunker elsewhere, deviating to Zhoushan due to the growing price difference. More calls at Zhoushan will help recognise it as a reliable bunker and supply option in the maritime community.

Important decisions and steps have already been made towards reaching the China’s goal of being self-sufficient in bunker fuel production and supply and developing Zhoushan as a key bunkering and service location in the Far East.

Anton Shamray
Senior Research Analyst
P: +44 207 4675 856
E: anton.s@integr8fuels.com

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Just over a month ago we put out a note on the collapse in oil prices and the pressures in the market from the significant loss in global oil demand because of ‘lockdowns’ against Covid-19.

Overview

Since then, estimates of demand losses have been even greater, and oil prices took another tumble at end April (only a couple of weeks ago). At the time of the last note the biggest estimates of demand loss were around 20 million b/d for April, more recent estimates are closer to 30 million b/d.

Over the past 2 weeks prices have moved off their lows and general sentiment now seems to be a bit more optimistic. OPEC+ did come to a ‘necessary’ agreement and formally settled on a 9.7 million b/d cut in production starting this month.

However, physical oil prices still remain in very steep contango and have hit such lows there will also be significant production losses from counties outside this agreement. The key focus here will be the US, with the high-profile shale production heavily exposed. US rig counts and spending are down massively, and the net result will be a reduction in output; the question is how much, with different analysts predicting anything between 1.5-3.0 million b/d losses.

So, we are now entering the next phase in developments, with production coming down and at the same time countries coming out, or planning to come out of lock down; most visibly in growing pressures within the US to ‘open up’. These are clearly more bullish signals than we have seen, and Brent front month futures prices are around $10/bbl above their lows (from $20 to $30).

These price moves have been mirrored in the bunker market, with VLSFO down by more than $500/ton since the start of the year, but up around $65/ton in the past couple of weeks (in-line with a $10/bbl rise in crude prices).

Despite this, it is still far too early to say we are on a definite upwards trend. Oil stocks are still increasing, and this is expected to continue for at least another 1-2 months. The cuts in crude oil production are chasing the losses in oil demand, but are still not big enough to bal-ance the market today and we still have more surplus oil to come. Averaging a number of analysts’ expec-tations, they indicate oil demand was down by around 22 million b/d in April, but the highest ana-lysts were around a 29 mil-lion b/d loss.

All analysts expect the losses to diminish over the year, but the pace varies; the blue columns in the graph represent an average view of monthly losses in demand versus year earlier and the incremental orange columns show the biggest estimated demand losses. Either way, the losses in April/May are bigger than any anticipated production cuts and it is only from around June/July that we are likely to see stock levels start to fall, and then from exceptionally high levels. Consequently, the price contango in the oil market may have eased slightly over the past 10 days, but it is still far bigger than we have seen historically, with physical Brent crude still at extreme levels of $10/bbl below the front month futures price. Both the absolute price and the price contango are key features we must focus on .

It is the extent of the demand loss and then how quickly demand returns, plus how big the production cuts actually are, including OPEC+ adherence and the ‘economic shut-ins’ (not only in the US, but Canada, Norway, Brazil and elsewhere). In addition, market sentiment and expectations will also play a significant role in determining the timing and extent of price recovery.

The speed at which we come out of this demand shock is still a big uncertainty. The main impacts on demand have clearly been in the jet fuel, gasoline and diesel/gas oil markets (not so much in fuel oil). Expectations are that gasoline demand will start to recover first, then diesel/gas oil and finally jet, but this may be some way down the line. In terms of OPEC+ production cuts, analysts using AIS ship tracking can get a very good and immediate handle on exports, which will go a long way to identifying adherence.

Finally, one of the more visible and used signs in the market are oil stock levels (crude and products), and although official figures for most countries are too long after the event to cause a price response, in the US there are the API and then the EIA both publishing weekly data. Significantly, these figures are still building, and price moves often reflect whether the gains are bigger or smaller than expectations. Hence oil prices are currently stuttering either side of $30/bbl for front month Brent, with gains in stock levels either bigger or smaller than predicted.

The graph below illustrates four cases to look out to see which track we are likely to be on, ranging from an extended period through 2020, 2021 and into 2022 if the demand losses are ‘bigger’ and the production responses more muted.

At the other end of the spectrum, if demand losses are smaller (this is still around 20 million b/d in April!) and the production impact in the likes of the US is severe, then we could be in a rapid tightening in oil markets and a rapid return to higher prices over the course of the second half of this year. The truth is we are more likely to be some-where between these two extremes, and the current Brent forward curve (which is not a forecast) is tracking closer to the orange line, at around $33/bbl at end 2020 and $38/bbl at end 2021. This would imply VLSFO prices below $300/ton for the next 12 months.

However, as more data, analysis and insights emerge we will have a greater idea of what track we are really on and how long low oil prices are likely to be with us. One thing is that in all cases oil stocks remain well above recent levels at least through to end 2021. Keep watching the stocks numbers, the price and price contango, OPEC+ and US production and finally the true pattern of oil demand.

Steve Christy Strategic Communications Director
P: +44 207 4675 860
E: Steve.C@integr8fuels.com

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The short answer is yes, but not always. Continuous price monitoring is key to identifying price dislocations between different ports.

Overview

The world is currently going through a very turbulent time with oil prices recently falling to the multi-decade lows. Bunker fuel expenses, once being the dominant part of the voyage costs, have for now become somewhat less important, particularly in the tanker market, where freight rates skyrocketed and avoiding delays has taken priority.
However, this low bunker price environment and/or high tanker rates are temporary and once the situation goes back to ‘normal’, more attention will again be paid to reducing the bunker bill to increase voyage earnings.
There are a number of ways that can help and one of these is to be open-minded about the bunkering location, which at times may mean refuelling outside of the major hubs if prices dictate so.

Bunker-only calls no longer a feature of hub ports

The bunker market has transformed extensively in the past couple of decades. From a limited number of bunker-only ports (mostly hubs), many more are now open for bunker-only calls.
As an example, Figure 1 shows both the hubs and the secondary bunker-only locations in the Mediterranean together with vessel traffic.

As can be seen, in addition to the main hubs bunkers can now be picked up in some smaller ports like Lisbon, Sarroch, Augusta, Piraeus as well as Kali Limenes and off-shore in the South Eastern part of the Mediterranean, pricing for which can be obtained on enquiry. Therefore, it is important to monitor prices not only in the hub ports but also in the smaller locations.

The price, of course, is not the only factor to consider. Quality, availability, weather and other delays together with calling costs can influence the bunker location choice. However, with these factors often being equal or near equal, the port and supplier offering the best price usually gets the stem.

Cheapest price not only in hubs

While bunker hubs often mean a higher number of suppliers, better availability and pricing, this is not always the case, particularly following the transition to VLSFO as the main compliant fuel.

The chart above shows an example of what the ‘normal’ bunker pricing would look like. Just over a year ago, in February 2019, a buyer or an operator of a vessel needing bunkers passing through the Mediterranean would habitually enquire in Gibraltar or Malta and typically get the best price compared with the alternatives.

Then the market started changing prior to the IMO2020 transition so the usual pricing relationships between ports were broken. HSFO in some hubs started to sell at hefty premiums to the secondary ports. The bottom chart on Figure 2 shows the $40/mt premium Malta attracted over neighbouring Augusta in early October 2019, potentially resulting in a $20,000 overpayment on a 500mt stem.

From 01 January 2020, with the market fully transitioning to VLSFO as the main compliant fuel, price distortions spiked. For a period of time and due to the very limited availability, Singapore VLSFO was pricing way above anywhere in the region and even above LSMGO. While the bunker market has largely settled, certain pricing dislocations have remained.

Figure 3 shows a couple of recent VLSFO price dislocation cases and the emergence of Lisbon as a viable and often well-priced alternative, which has so far in April on average traded at a $20/mt discount to Gibraltar.

Excluding Lisbon, on 20 March 2020 it was ‘business as usual’ with both Gibraltar and Malta priced at a discount to other ports. However just over a month on, VLSFO prices dropped across the board following the drop in oil prices, although VLSFO in Gibraltar remained relatively strong.

It is estimated that booking a 500mt stem in Gibraltar vs Malta or Lisbon on 22 Apr 2020 would have resulted in at least $10,000 in overpayment. Besides this, Piraeus would have also become a viable option for vessels sailing from the North East of the Mediterranean.

Overall, it is worth noting that bunker prices fluctuate on a daily basis and bunker ports (including hubs) may frequently move from ‘expensive’ to ‘cheap’. Such price movements as well as delays, fuel quality, and changes in port call costs should be closely monitored in order to select the most optimal bunker port, achieve bunker bill savings and increase voyage revenues.

Anton Shamray
Senior Research Analyst
P: +44 207 4675 856
E: anton.s@integr8fuels.com

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