The Future of Bunker Prices: Relative to Crude, MGO Will Be More Expensive, HFO Will Be Cheaper

Average price of bunkers in Singapore, Rotterdam, Fujairah, and Houston. Brent converted to USD per metric tonne at 7.53 barrels = 1 metric tonne.

Disclaimer: As Niels Bohr has warned, "Prediction is very difficult, especially if it's about the future." With that said, based on analysis of the available data, it suggests that in the future MGO is going to be more expensive relative to crude, HFO is going to be cheaper, and the gap between them will widen.

In fact this is a trend that began in earnest last year with the collapse of oil prices, data from Ship & Bunker shows, and several market indicators suggest this will now be a permanent trend.

The top most of the above two graphs shows the average price of IFO380 and MGO across Singapore, Rotterdam, Fujairah, and Houston as a percentage of the Brent crude close price converted at 7.53 barrels of Brent per metric tonne. For reference, it also shows the Brent price in USD per barrel.

The lower graph shows the absolute per metric tonne average price of IFO380 and MGO across the same four ports, along with the Brent crude price converted at the same 7.53 barrels of Brent per metric tonne.

Both graphs use the same three year time period, from November 1, 2012 to October 31, 2015.

MGO Premium, HFO Discount

From November 1, 2012 until September 2014, MGO was priced at a premium of 15 to 20 percent over Brent, while IFO380's discount to Brent put it at 70 to 80 percent of the Crude price.

After then, once the serious fall in crude prices began, IFO380's relative price witnessed a mild increase but remained in the 70 to 80 percent band.

The premium for MGO, meanwhile, rocketed to over 70 percent above Brent before settling in the earlier part of 2015, and from May 2015 has generally been priced at a premium of 30 to 40 percent to the Brent price.

IFO380, meanwhile, has slipped to between 60 and 70 percent of the Brent price, and in recent months has struggled to venture over the 65 percent mark.

For those looking purely at the cost of MGO relative to HFO, in the period leading up to the oil price collapse MGO had a premium of 50 percent over IFO380. Now MGO is around double the price of HFO.

Emissions Control Area Rules

This change has also come in a year of reduced HFO demand and increased MGO demand, courtesy of tightened Emissions Control Area (ECA) rules which, from January 1, 2015, has required a marine fuel with a maximum 0.10 percent sulfur content be used within the respective European and North American zones, effectively ruling out the use of HFO without additional technology such as a scrubber.

For 2016, in addition to reduced HFO demand from ECA rules, with a continued oil glut likely, a change in China's teapot refinery rules expected to put Asia fuel oil prices under pressure, a lifting of sanctions against fuel oil exporter Iran, a weak global economic outlook, and dire market conditions for dry bulk and box shippers, it is difficult to see how next year - or the subsequent few years - could produce the conditions necessary to significantly lift demand, and relative prices, for HFO.

And with a 0.50 percent global sulfur cap potentially only a little over four years away, striking perhaps the most serious blow yet to HFO use, it is difficult to see how the conditions necessary to lift HFO demand, and its price relative to crude, will happen at all.

Future Outlook

With billions of dollars in refinery upgrades to repurpose marine's current fuel oil use literally decades away, fuel oil prices, relative to crude, could eventually fall even further.

MGO demand, as a result of the same drivers, is set to rise, and this will only increase MGO's premium relative to crude and widen its differential with HFO.

The net result should mean that, in a post 0.50 percent global sulfur cap world, whether that be 2020 or 2025, the cost savings case for using HFO and a scrubber will be somewhat stronger than it is today.

But a word of warning for shipowners: Keep in mind that 10 years ago, ECAs were still only an idea, 2005 was the year that MARPOL Annex VI was adopted along with a global sulfur cap of 4.5 percent, and in that same year the world saw its first ever global conference addressing the environmental impact of bunkers and the associated legislative consequences for shipowners - the Marine Fuel Sustainability forum in San Francisco.

In 10 years from now shipowners could very well be presented with an operational landscape altered by an equally significant magnitude, and LNG bunkers, hybrid battery ships, and even wind power could all be a fundamental part of the global fleet's propulsion picture.

That is, after all, no more radical of an idea than suggesting back in 2005 that within the next 10 years MGO could be the dominant marine fuel.