In the run-up to IMO2020 doubts existed whether there would be enough VLSFO available to meet demand, while HSFO was thought to remain in abundance. The reality however is very different, with the corona virus putting a cap on bunker demand, the growing oversupply of VLSFO and a relative HSFO tightness and availability concerns have become the new reality.

As the scrubber fleet continued to grow, reports of HSFO non-availability started to appear. With certain regions and ports currently not offering HSFO, owners and operators of scrubber tonnage may experience difficulty procuring HSFO and need to shift to more advance bunker planning.

Scrubber vessels, HSFO supply and demand

In the main shipping sectors, including tanker, bulk, gas, container and cruise, the share of scrubber vessels is relatively low by number, at 4%, and slightly higher by deadweight, at 10% – meaning fewer stems but larger volumes per stem. Due to this, many suppliers prefer not to stock HSFO for now.

However, as seen on Figure 1 scrubber vessel operations are spread globally and, while a share of HSFO demand is linked to term contracts, the majority of scrubber vessels procure bunker fuel on the spot market.

The mismatch between the global operation of the scrubber fleet and the
ports with HSFO supply has created difficulties for the owners and operators of scrubber tonnage when it comes to HSFO procurement.

Figure 2 shows the global number of HSFO spot stems in Feb-Mar 2019, which cover most ports, hubs and regions.

Looking at the past couple of months (Figure 3), the picture is very different
with South America, West Africa, Black Sea, India, Australia and New Zealand are among the regions with little or no HSFO availability.

Even with HSFO available in major hubs, the number of suppliers have
decreased sharply. In some locations out of many suppliers present, only one or two carry HSFO stock and delivery slots can often get booked quickly.

At the moment, one half of the scrubber orderbook has been installed. Assuming most of the remaining orderbook is put into service (and currently it is hard to see many new orders placed), it will likely still not be enough to change the position of HSFO in the global bunker market so the expectation is for continuing difficulties with sourcing HSFO, at least in the near future.

Therefore, owners and operators of the scrubber fitted tonnage should plan
HSFO bunkering well in advance where possible and we recommend the following based on the recent HSFO buying experience:

• Availability and competitive pricing are more likely for enquiries with
lead times of 7 or more days

• Enquiring for HSFO not only in hubs but also smaller ports, which could
at times be more competitive on pricing and have better availability

• As the VLSFO/HSFO delivered spread has narrowed and on certain
occasions gone close to single digit figures, it is worth checking both VLSFO and HSFO prices adjusting for the difference in calorific value and
additional scrubber consumption when deciding which grade to buy.

Overall, current HSFO availability and pricing have clearly proved many
forecasts wrong. In this situation owners and operators of scrubber tonnage
can clearly benefit from more advance planning and access to transparent pricing and availability information.

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

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There is a little more clarity in oil market pricing, but still huge uncertainty on where things are going. It was just a few weeks ago when news of the coronavirus started to hit and OPEC put forward a proposal to cut production by around 1.5 million b/d, but only if there was the support of the OPEC+ group (principally Russia). The agreement didn’t happen, Saudi opened the taps and oil prices collapsed. With hindsight the proposed 1.5 million b/d cut was ‘a drop in the ocean’, with analysts now indicating that global oil demand could be an unprecedented 20 million b/d lower in April 2020 than in April 2019, and also some 4-6 million b/d down for this year as a whole. So, near-term oil supply is up by around 2-3 million b/d and demand down by around 15-20 million b/d. Markets tend to tell you almost everything and we have seen a near 70% collapse in crude prices since the start of the year to hit 18-year lows. At the same time the crude market has switched from backwardation to steep contango, bringing storage into play.

So, what about bunker prices. We are no different in terms of being driven by absolute prices in the oil market and VLSFO in Singapore and Fujairah is around $500/ton lower than at the start of the year (minus 66%). Prices in Rotterdam are below those in Singapore and Fujairah and so the absolute drop has not been as great, at around $370/ton, but in percentage terms it is more-or-less the same at 63% lower.

Understandably, there have been even greater pressures in the jet and gasoline markets, where demand destruction is at extreme levels. It has been well documented on how airlines are suffering, and this is clearly seen by the demand for jet fuel, which is down by a massive 77%.

In volume terms, the loss in gasoline demand is even greater than jet, but with the gasoline market almost four times bigger, the percentage drop is around 26%; still hugely significant. The demand impact in the bunker market has been relatively limited, with fuel oil consumption down by an estimated 7%.

The collapse in oil prices is clearly the headline news, but relationships across the barrel have altered significantly. Before this happened, on a weight basis in NW Europe, jet fuel was around $120-140/ton above Brent, gasoline $90-110/ton and VLSFO $30-50/ton higher than Brent. The loss of jet and gasoline demand meant the crack spreads for these products have tended to fall further than other products.

However, over the past couple of days we have seen physical crude oil prices fall even further and faster than products and, as shown in the graph, crack spreads have widened. At the same time the relative price of VLSFO has risen and is now priced similar to jet and above gasoline.

For refiners the question is not about absolute prices, but the difference between crude and product prices and what this means for their refinery margins. In such a violent market there are always leads and lags that affect the margin on a day-to-day basis, but the current downwards pressures on physical crude oil prices are so extreme, and on paper margins have soared. However, the reality out there will be very different for different refiners and for those with positive margins they will continue to process, whether the demand is there or not. We are in a vicious cycle; there is too much crude and to generate buyers it has to be sold (or stored) at a profit.

There are already stories of some refiners severely cutting runs. Some of the most vulnerable are likely to be land-locked, without endless storage or the ability clear products. For the rest it will be different for different refiners, depending on the type, infrastructure and connectivity of the refinery. But if refinery margins stay positive and storage economics work and there is somewhere to put the products, then those refiners that can will continue to run; we will just see huge builds in products stocks.

The consequence of the hike in oil supply and the downfall in demand is these massive builds in oil stocks. This is yet to show in weekly stocks reports, but it is coming, and the oil price structure already reflects
this.

Backwardation has been replaced by steep contango in the crude market, and for Brent the difference between physical and front month futures prices is now $7/bbl, with the contango running at around $17/bbl over the next 6 months This means storage economics are now very favourable (traders will still make money storing crude on a VLCC and paying $140,000/day for it). It is just that supply goes into storage rather than into consumption.

Clearly the longer we go down this road, the bigger the stock-build will be and so take longer to unwind. So how do things change? We either see a sharp rebound in demand or a major cutback in supply, or a combination of both. On the demand side, current expectations (which can obviously change) are that things will ease from May onwards, but that demand will still be well below 2019 levels for most of this year, plus there is also the issue of recession; so no quick fix here. This then points to any potential cutback in supply, which in the near/medium term would seem to need Russia to come back to the table and approve an OPEC+ agreement. If this is the case, then the cutback will have to be much bigger than the 1.5 million b/d proposed last time round. Global politics may yet come up with something else, but what we don’t know. Alternatively, could we see the industrial collapse of oil production at a field, company or even country level? Without any of these, stocks will continue to build, oil prices are going to remain low and could fall even further.

At the time of writing President Trump indicated that Saudi Arabia and Russia will announce an agreement to cut production by 10 million b/d (or more), to which the price responded positively and then fell back a bit; we just have to see if such an agreement is formally announced and adhered to.  If not, then global politics may yet come up with something else, but what we don’t know.  Without any of these, oil stocks will continue to build, oil prices are going to remain low and could fall even further.  Then it may be the fall in oil supply will come from the industrial collapse of oil production at a field, company or even country level.  The pressure is clearly on an agreement to cut production in the near term; let’s see what happens. 

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

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The recent drop in VLSFO viscosity has been a talked about topic. It is the result of more distillate making its way into the VLSFO blending pool. Having analysed over 15,000 VLSFO test results, viscosity was found to have dropped by over 35% between November 2019 and March 2020, from 160cst to 100cst.

Lower VLSFO viscosity has been linked with a number of potential issues, from purification difficulties to stability and ignition problems. This is particularly applicable to the <30cst viscosity product, whose has been growing.

The reason for more distillate going into the VLSFO blending pool is pricing, where at times VLSFO was sold at a premium to MGO — a phenomenon few could envisage prior to the IMO 2020 switch.

Using Singapore as an example, Figure 1 shows how the cargo pricing spread between VLSFO and MGO affected the viscosity levels of VLSFO sold locally.

The line for viscosity has been shifted one month back as in reality there is always a similar lag between the pricing reaction and the fuels being produced, making it to the bunker market and getting tested before put to use.

It is clearly seen that both viscosity and the pricing spread movements are very similar. In recent weeks the MGO premium to VLSFO cargo in Singapore flipped from negative back to the more expected positive and this is likely to put a cap on the amount of distillate going into VLSFO blending.

The expectation is that more non-distillate blending components will start being blended to produce VLSFO pushing viscosity higher and potentially resulting in a different mix of VLSFO quality issues.

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

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VLSFO quality remains a headline IMO2020 topic. As suppliers are getting
more experienced at producing VLSFO blends, the proportion of off-spec tests has been declining, although certain quality concerns remain. One of these is the reduction in viscosity, which is due to more distillate blending. This has resulted in vessels being required to adjust age old practices in order to handle and consume the fuel and moreover requires a change in tact when procuring bunkers. The choice of fuel is often limited, however checking quality before buying is as important as ever in order to minimise the risk of claims.

Lower off-specs but watch viscosity and associated issues

Up until recently, the main concern with regard to VLSFO quality was the
relatively high number of off-specs, compared with the other grades like HSFO and LSMGO, and particularly on the “sensitive” parameters. However, as seen in Figure 1, this is now changing and the share of VLSFO
off-specs has been declining.

On the other hand, it was found that it is not always necessary for a fuel to be off-spec to result in quality issues when it comes to storing and consuming it.As the market adjusts to the IMO2020 switch and pricing made it favourable, more distillates have recently made their way into the VLSFO blending pool. As suppliers are getting more experienced at producing VLSFO blends the proportion of offspec tests has been declining, although certain quality concerns remain.

Figure 2 below shows the increase in the share of distillate based VLSFO blends and the associated reduction in viscosity.

Indeed, viscosity dropped globally from around 160cst in early November to around 100cst by March, a drop of over 35%. At the same time the share
of distillate based VLSFO went up from around 20-25% to 35-40%. The viscosity drop has affected most bunker hubs. For example, viscosity in ARA dropped 30cst by March to 100cst and there was a bigger decrease in Singapore, from 170cst down to 90cst, with an even bigger reduction in
Malta, from 150cst to 50cst.

The trend of lowering viscosity in combination with other factors is a cause for concern. Viscosity, density, pour point, aluminium and silicon (ALSI), and sediment potential (TSP) require careful assessment when purchasing and consuming the fuel.

While the majority of ports recorded very few off-spec fuels in January, several locations were particularly affected.

Viscosity and Pour Point

In the past the effective purification of HSFO required a temperature of 98 deg. C for any fuel over 180cst. Given that many VLSFO fuels are now well below this viscosity level, the purifier temperature is adjusted lower to achieve 20-24cst viscosity in the purifier (for example 58 deg. C for a 30cst fuel).

However, the new VLSFOs are more paraffinic (waxy) and with a higher pour point than HSFO. Under reduced purifier temperatures such fuels may tend to produce wax sludge, which could cause serious handling difficulties; it could also potentially affect the efficiency of removing particles such as aluminium and silicon to safe levels.
It is also essential to inject VLSFO into the engine at the correct injection viscosity. For very low viscosity VLSFO the temperature to achieve the correct injection viscosity may well be on, around, or in extreme cases below pour point (at which the fuel no longer flows) and the wax appearance temperature. For example, in order to inject a 5cst and +12 pour point VLSFO.

The trend of lowering viscosity in combination with other factors is cause
for concern it has to be heated or cooled to 18 deg. C, which is only 6 deg. C above pour point (recommended min. 10 deg. C above pour point). In trying to rectify this by increasing the injection temperature the corresponding fuel viscosity would fall, in effect leaving an impossibly small window to operate in outside of which poor combustion, deposit formation and loss of energy may occur even though the fuel is fully compliant with the contractual specification.

Therefore, some owners may prefer buying VLSFO with minimum 30cst viscosity for RMD/E/G/K grades where pour point is limited to 30 deg. C maximum. Alternatively, if the fuel available is less than 30cst viscosity, it is recommended to be sold against the RMA 10 or RMB 30 spec for which there is a much tighter 6 deg. C (0 deg. C for the winter spec) limit on pour point.

Density and Viscosity

High density in combination with low viscosity remains a cause for concern for VLSFOs, similar to HSFO due to the possibility of poor or delayed ignition and combustion which can result in engine damage. This is also reflected in high CCAI readings in such fuels. It is important to remember that the 2005 ISO specification does not offer CCAI protection.

Analysing over 15,000 VLSFO test results it was found that TSP (the ability
of the fuel to deposit sediment) appears to trend up with a decrease in viscosity (Figure 3). This may be due to distillate blending and where different VLSFO components (paraffinic, naphthenic, aromatic) are
mixed together in a blend.

Moreover, given that the hot filtration test is performed at 100 deg. C the
effects of lower purification temperature (due to fuel’s low viscosity)
on the purifier with regard to wax formation may not be fully identified.

Overall, VLSFO quality seems to be improving with fewer samples tested offspec, however checking quality before buying is as important as ever. The ISO spec sets the upper limit for most parameters and it was found that even with all parameters on-spec, some VLSFOs may be more problematic than others. This is not normally the case with HSFO where most parameters vary in a much narrower range and average viscosity, despite dropping slightly recently, is still around 300cst.

When it comes to bunker procurement, Integr8 Fuels provides its customers
with full information not only on the price but also on quality, availability and delays. By analysing global trends and changes in quality, Integr8 Fuels are well positioned to help procure quality fuels and minimise the risk of claims.

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

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The absolute price of bunkers has fallen sharply since the start of the year, largely inline with the fall in crude. The easing of Middle East tensions, higher oil stocks, and now, far more significantly, the impact and uncertainty surrounding the Coronavirus have meant oil prices have dropped. Correspondingly, representative VLSFO prices East of Suez are down from around $750/ton in early January towards $500/ton currently, a drop of some 25-35%.

However, as a bunker buyer we have no control over the absolute oil price; what we
do have some control of is when and where we make our purchases.

The switch to VLSFO has highlighted the extreme moves in pricing that can take place;
at one stage in early January Singapore VLSFO prices were $60/ton less than in
Fujairah and soon after South Korean prices were $60/ton below Singapore. There
were clearly huge potential savings in bunkering ‘at the right port’, and although
these extremes have eased there are still significant opportunities to save money in
the bunker market.

The huge distortions in VLSFO pricing between different ports at the start of the year were associated with the introduction of IMO 2020 and ran through to the 3rd week of January. Although relative prices then appeared to settle down, more dramatic moves again hit the market in mid February, when South Korean prices moved to $30/ton above Singapore and Fujairah prices moved from being well below Singapore to now above Singapore.

Just looking at these 3 ports over the past 3 months, what it does show is that the
most ’advantageous’ pricing has shifted from Singapore to Fujairah, back to
Singapore, then to South Korea, back to Fujairah and now again to Singapore.

Notwithstanding issues around availability and quality, and all other possible
bunkering locations, in this case there is easily a $20/ton bunker saving to be had,
even in today’s ‘more settled’ markets. On a VLCC this is equivalent to close to
$1,000/day, on a Capesize bulk carrier $500/day, and on a 9,000 teu containership a
$20/ton saving on bunkers equates to more than $1,600/day.

We are possibly beyond the most extreme volatility in relative VLSFO pricing.
However, there is still a lot to monitor in the bunker market, and significant financial
savings to be had from high quality market knowledge and analysis alongside forward
bunker planning.

Steve Christy
Strategic Communications Director
P: +44 (0) 207 467 5860
E: steve.c@integr8fuels.com

Download this article as a PDF »

It has been over a month since the IMO2020 regulation came into force and there are mixed views on how the transition has gone so far. Some participants claim the switch has gone smoothly, while others highlight the constant quality issues with the VLSFO blends.

As we moved through the later part of December and now fully into 0.5% sulphur compliance, so VLSFO prices have risen sharply, not only in absolute terms (up 25- 35% since early December) but also higher relative to crude oil. The pricing of VLSFO reflects all the issues around the market, including demand and availability (or lack of it). One fallout is that reported prices for VLSFO are now extremely close to MGO, with the difference now typically less than $20/ton, compared with VLSFO ‘discounts’ anywhere from $40/ton to $120/ton just one month ago.

Integr8 Fuels’ analysis of global fuel quality data covering November 2019 to January 2020 shows the improvement in the overall fuel quality of VLSFO. However, there are concerns about the continuing decrease in viscosity and the increasing likelihood of more sedimentation and stability issues.

Despite VLSFO having only marginally more off-specs than HSFO, it is the critical quality parameters that are often recorded off-spec in VLSFO, potentially causing technical problems on board vessels.

While the majority of ports recorded very few off-spec fuels in January, several locations were particularly affected.

Fuel quality analysis

For the analysis, Integr8 Fuel’s live global fuel quality database was used. It receives over 400 results daily and has accumulated over 38,000 ISO8217 test results since November 2019, which have allowed for a detailed insight into fuel quality and associated issues.

It is worth mentioning, that there are limitations in the scope of ISO8217 testing, but this remains the main marine bunker fuel quality test and as such can help understand why there are such mixed views about VLSFO on the market.

Figure 1 summarises the tests the analysis is based on, and shows a representation of how quickly HSFO has been losing its market share to VLSFO and LSMGO. VLSFO now constitutes the majority of the bunker fuel supplied, followed by LSMGO, HSFO and ULSFO.

While switching to LSMGO is rarely associated with problems, particularly in modern vessels, switching to VLSFO has definitely highlighted a number of issues.

Naturally, quality issues are associated with a higher number of blends on the market, where at least one parameter is found off-spec.

However, Figure 2 shows that the number of off-spec VLSFO tests was only marginally higher than HSFO (and lower than ULSFO) in January and has been declining over the past three months.

This gives an impression that VLSFO is becoming less problematic, contrary to the news on the market.

In further analysis, January off-specs were broken down by parameter and the severity of each parameter being off-spec.

This is summarised in Figure 3 with critical parameters coloured in red, less critical in yellow and least critical in green. Critical VLSFO parameters like sulphur, TSP, ALSI and flash point jointly share around 60% of all VLSFO off-specs, compared with around 20% for HSFO.

It is worth mentioning that on off-spec critical parameters VLSFO is very similar to ULSFO, which is blended to an even tighter sulphur limit.

Indeed the consequences of these parameters being off-spec are much more serious, including damage to machinery, filter blockages, the inability to burn bunkers or even de-bunkering—all these are more likely to result in claims and end up in the news headlines.

On the other hand, off-spec (within reason) pour point, water content, density or viscosity can be dealt with on-board and are less likely to lead to a major problem, which has often been the case with HSFO.

On the port level, the majority of locations presented very few VLSFO issues. However, several ports in January were particularly prone to off-specs on critical parameters (Figure 4), including several ports in the Mediterranean, North America and the Caribbean.

As the VLSFO quality situation is dynamic, it is very important to stay up-to-date with the changes in the market. Integr8 Fuel’s global fuel quality database allows us to monitor in near real-tme the changes in fuel quality and be proactive in our buying strategies in order to procure the best quality fuels for our customers.

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

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In our last research note in December we pointed out that the differential between quoted prices for MGO and VLSFO in Singapore had fallen from $75/ton to only $10/ ton over a couple of months. This squeeze in the MGO/VLSFO differential is now commonplace in all the main bunkering centres.

As we moved through the later part of December and now fully into 0.5% sulphur compliance, so VLSFO prices have risen sharply, not only in absolute terms (up 25- 35% since early December) but also higher relative to crude oil. The pricing of VLSFO reflects all the issues around the market, including demand and availability (or lack of it). One fallout is that reported prices for VLSFO are now extremely close to MGO, with the difference now typically less than $20/ton, compared with VLSFO ‘discounts’ anywhere from $40/ton to $120/ton just one month ago.

This means we have moved from a market where, on price, VLSFO was a clear and obvious fuel choice in the run-up to IMO 2020, to a market now where MGO may be the best option, especially considering generally higher energy content and no heating requirements.

Clearly, there are major issues in availabilities, delays and pricing highlighted by these developments, and possible technical issues between using different grades, but again this stresses the need for information and analysis in what is now a very differ- ent and complex bunker world.

Steve Christy
Strategic Communications Director
P: +2074675860
E: SteveChristy@navig8group.com

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We are clearly well into the IMO 2020 transition; changes in bunker infrastructure, availabilities and pricing are all having a major impact, posing challenges to bunker buyers and these are not going to go away quickly.

The process of switching infrastructure (storage and barges) from HSFO to VLSFO has been noticeably underway since September. We have seen a significant strengthen- ing and then weakening in HSFO prices (see Integr8 briefing note 22ndNovember 2019) and now we are at the next stage, where buyers have/are switching rapidly towards VLSFO. The impacts of this change-over are again easily seen, in terms of terminal congestion, barge delays, availabilities and of course price.

Since October the quoted price of HSFO has fallen sharply, whereas the price of VLSFO in Rotterdam has been around $480-500/ton. VLSFO prices in Gibraltar, Fu- jairah and Singapore rising fast and well above the $540-560/ton range we saw in Oc- tober/November. This means quoted VLSFO prices are now around $230-240/ton above HSFO.

The moves in VLSFO pricing reflect owners shifting towards these new compliant fuels and that there are constraints on infrastructure and availabilities in the VLSFO supply chain. The extent of this is not only seen in VLSFO price differences between main bunkering regions, but also VLSFO pricing within a given region. The graph below il- lustrates the significant variation in VLSFO pricing within the Mediterranean, with for instance quoted prices at Piraeus sometimes anywhere between $20-80/ton below Gibraltar prices and prices in Malta still plus or minus $20/ton compared with Gibral- tar quotes. These positions mean as a buyer, being adaptable and looking at possible alternate bunkering locations could be very attractive.

Finally, these squeezes in VLSFO have already led to instances where there is an extremely small price differential between VLSFO and MGO (or even some instances where MGO has been priced below VLSFO). Currently, there is less than $10/ton differential between quoted prices for MGO and VLSFO in Singapore, down from around a $75/ton differential a couple of months ago. This is another strong case for buyers being adaptable in that bunkering MGO could be the ‘best option’.

These developments in the Med and Singapore markets are only illustrations of what can happen in other global regions and reflects the squeezes on the VLSFO system at certain times and in certain areas. There is no ‘quick fix’ here and issues will continue to arise well beyond the January 1st IMO 2020 start date, as shipowners start burning VLSFO and will have to build and replenish VLSFO stocks on board.

We are providing buyers with access to this information and analysis on any tightness in availabilities, any constraints on terminal and barging operations and ultimately the knowledge on pricing, all of which will assist decisions in this complex and consistently changing market.

Steve Christy
Strategic Communications Director
P: +2074675860
E: SteveChristy@navig8group.com

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For many years buying bunker fuel has mostly been about getting the best quoted price and avoiding quality issues. This is as topical today, particularly going into 2020.

Buying the best quoted price, however, does not necessarily mean buying the cheapest fuel. One fuel property that often gets overlooked is net calorific value (will simply refer to as calorific value going forward), which shows how much energy is produced by combusting the fuel.

According to Integr8 Fuels’ survey of customers, the majority of bunker fuel today is bought basis the quoted price. Only a handful of customers (12%) take calorific value into consideration, however over 30% indicated they are willing to buy on the calorific content basis provided such an adjustment is available at the time of buying. The ability to buy on-spec fuel and maximise calorific value can result in substantial savings.

With real-time quality data and the calorific value price adjustment always to hand, Integr8 Fuels provides the ability to secure truly the cheapest price without compromising on quality.

Which fuel parameters affect calorific value?

Calorific value, despite its importance, is a secondary calculated parameter and is not part of the ISO8217 spec. However, in order to calculate it four parameters are used, namely density, ash, sulphur and water, all of which are part of the ISO8217 spec. Having analysed over 5,000 samples, it was found that density has the biggest bearing on calorific value (Figure 1), whereby calorific value increases with a decrease in density.

Calorific value comparison by fuel type

Looking at over 300,000 samples of different types of bunker fuel, it can be seen that HSFO on average has the lowest calorific content, while LSMGO the highest. The new fuel type, VLSFO, tends to straddle the two, see Figure 2.

On average VLSFO has 3% less energy than LSMGO and 3% more energy than HSFO. Higher calorific value VLSFOs (>42 Mj/kg, also often more paraffinic with lower density and viscosity) tend to produce about the same energy as an average LSMGO, and lower calorific value VLSFOs (<41.5 Mj/kg, with higher density and viscosity and cracked material blended in) will have the same energy as an average HSFO.

Calorific value price adjustment

Calorific value also varies greatly within each fuel type, for example some VLSFOs can contain 3-5% more energy than others, depending on density, ash, sulphur and water content.

In order to compare fuels on calorific value, an adjustment factor is needed for which the average global calorific value by fuel type is taken as a base. Individual calorific values (calculated through either historical data, the most recent certificate of quality (COQ), or the current COQ) are then compared with the base and the adjustment factor is produced, which is then applied to the quoted price.

The economic impact of calorific value varies by fuel type, depending on the outright price. Figure 3 summarises the monetary difference in calorific value adjusted prices for HSFO.

As can be seen, assuming both 1st and 4th quartile suppliers offer the same price for their product, the price difference can be relatively high, adjusted for the difference in calorific value.

Given that VLSFO is priced much higher than HSFO, Figure 4 summarises the price difference between two VLSFO when accounted for calorific value.

As expected, given the much higher pricing seen for VLSFO, the calorific value adjusted price difference almost doubles to $15/mt compared with HSFO.

This highlights the growing importance of taking calorific value into account when buying bunker fuel as a means to achieve substantial savings. Having looked at the theoretical examples, actual stems can now be analysed.

Putting calorific content buying into practice

Calculations above show that buying bunker fuel on calorific value can result in substantial savings; this concept was then tested on actual stems.

The supplier enquiries were sent in the usual manner, with COQs requested from each supplier in order to calculate the calorific value. With the introduction of VLSFO, requesting COQs has rather become the norm, so in general there should be no issue in getting the current COQ from the supplier together with the quote. On relatively rare occasions when the current COQ cannot be obtained, the most recent COQ or historical averages can be used to estimate calorific value — these of course may not be as accurate. It is also possible that for stems with longer lead times current COQs may not be representative, however from what was observed this does not happen often.

Figure 5 contains the summary of supplier quotes and calorific value adjusted prices for a VLSFO stem fixed in Singapore in late October basis calorific value.

On this occasion all COQs indicated good quality fuel well within the spec limits. The first two suppliers’ calorific value was below the global average resulting in the negative price adjustment, which brought the price higher.

Supplier 1, despite quoting the lowest price, turned out to be the most expensive given its relatively low calorific value, whereas Supplier 2, despite quoting the second best price, was in fact the cheapest. Supplier 2 was eventually chosen for this stem with the lifting quantity of 1,250mt.

Buying this quantity from Supplier 2 basis the quoted price would have resulted in the perceived overpayment of $2,500 ($2/mt * 1,250mt) compared with Supplier 1, in fact taking calorific content into account choosing Supplier 2 resulted in $6,250 ($5/mt * 1,250mt) of savings — this can cover Capesize operating costs for a day.

Conclusion

It has been shown that buying bunker fuel on calorific value, rather than the quoted price alone can result is substantial savings. The main reason this method has not seen a wide adoption yet is due to the fact that most bunker buying systems do not have the calorific value adjustment readily available.

Integr8 Fuels has invested in data and systems through which it is possible to procure bunker fuel both on quoted and calorific value adjusted prices, opening the potential for bunker fuel savings.

Paul Marsh
Research Director
P: +44 207 9435 417
E: Paul.M@integr8fuels.com

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

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There will be a series of changes in bunker markets as we go through either side of the January 1st IMO 2020 implementation date, and recent price move- ments in HSFO is clear evidence the process is well underway.

In mid-September cargo prices for HSFO rose sharply, even to above crude, as bunker demand for the high sulphur product remained ‘as usual’, but availa- bilities were becoming constrained with:

• the initial shift in refining and storage infrastructure from HSFO towards VLSFO and;
• limitations in HSFO trade flows as a result of the steep backwardation in prices because of the impending ‘collapse’ in demand.

As shipowners move to 0.5% sulphur bunkers, HSFO cargo prices have dropped by half price

However, this mid-September hike in HSFO prices was very short-lived. Since late September demand for HSFO bunkers has fallen away as shipowners re- duce purchases and start to build 0.5% sulphur bunkers onboard ahead of Jan- uary 1st. As a result, cargo prices have been in near free-fall and more than halved over the 2 months to mid-November (from above $500/ton to below $250/ton in Singapore), to a point where HSFO is now only 50% of the price of crude oil, compared with an underlying average of around 80%, and the more recent spike when HSFO went above crude. The initial moves and fall-out of the IMO 2020 change-over are clear to see in the extent of the price drop in HSFO; as it is often said “price tells you every- thing”.

Shifts in HSFO barge and terminal infrastructure can be seen in the premium owners pay for HSFO delivered bunkers over and above the cargo price

This downwards pressure on HSFO prices is likely to continue as more ship- owners switch and build to use 0.5% compliant fuels onboard.

However, there is another nuance to the market change-over, in that buyers of HSFO bunkers haven’t seen the full impact of this drop in cargo prices. This is because owners are switching away from HSFO and towards purchases of VLSFO, so the barge infrastructure is beginning to shift in the same direction. The lower availability of HSFO barges and the growing logistical constraints on the terminal side are clearly represented in the premium owners are paying for HSFO delivered bunkers over and above the cargo price for the product.

In the main bunkering centres, delivered HSFO bunkers were typically around $15-30/ton above published cargo prices. The ongoing transition in the barge markets has meant constrains in this part of the system for HSFO deliveries and these premiums above cargo prices have moved to extreme highs, of above $70/ton in Fujairah, more than $80/ton in Rotterdam and close to $100/ton in Singapore. At this stage, the premiums in Singapore are falling, but in Rotterdam they are rising. We are in the phase where HSFO is still in demand but falling, and the number of barges delivering this product are in decline, with a significant number having to prepare ahead of the large-scale move to VLSFO. Shifting premiums represent the pace at which barges are switching versus the pace of decline in HSFO demand.

Since late September, the differential between HSFO delivered bunkers and cargo prices has accelerated

Through to mid-September our analysis indicates around 2-4 barges per week were switching into the VLSFO market. Since late September we can see this number has accelerated to around 40 per week and so clearly taking a toll on the capacity to supply HSFO to vessels.

In Singapore there are more than 300 bunker barges and we have identified 62 of these supplying VLSFO by mid-November (close to 20%). There are around 100 barges in Rotterdam and we have identified a similar 20% proportion that are supplying VLSFO. There is clearly the means to move barges between are- as, but globally we have measured around 12% of the barge market now carry- ing VLSFO and this is one of the factors why the price premium on HSFO bun- ker deliveries has moved to its recent highs.

However, over the same period we have seen virtually no change in the differ- ence between delivered MGO bunker prices and their corresponding cargo price in each region; on this basis it seems the demand and supply in this part of the bunker market has not yet changed significantly; but it will.

Barge premiums for MGO and VLSFO are now expected to rise

In terms of where we go from here, the HSFO premiums above cargo prices should ease as we go through to January, as demand for this product falls to only those owners with operational scrubbers on board. However, as this pre- mium declines, the barge premium for MGO deliveries is expected to rise (potentially to levels we have seen on the HSFO side), as those owners choos- ing MGO as their compliant fuel ramp up purchases. The same could be said for VLSFO as well.

Next year we would expect all premiums over the cargo market prices to be higher than the historical levels of $15-30/ton, given developments in the barge and terminal sectors. However, any ‘excessive’ premiums are likely to be short lived as the flexibility to move barges between markets will cap this, es- pecially in the main bunkering centres.

The number of barges will increase with conversions of small tankers

Given these developments and the added demand in the barge market from having to supply more products/grades than before, we are already seeing conversions of existing small tankers to bunker barges and the ordering of new bunker barges, which will at some stage boost availability at this point of the supply chain.

Overall, there are many moving parts to the bunker supply chain even at this stage. As the industry goes through the end of 2019 and well into 2020, even more changes to storage (land based and floating), barge numbers and opera- tions between HSFO, VLSFO and MGO and various product availabilities will take place. At Integr8 we are monitoring, measuring and closely analysing all these factors in the supply chain to minimise the greater operational and price challenges faced by shipowners and operators because of IMO 2020.

Steve Christy
Strategic Communications Director
P: +2074675860
E: SteveChristy@navig8group.com