20|20 Marine Energy: Cheap Oil and Bunkers Have Caused a State of "Flux" Within the Shipping Industry

Adrian Tolson, Senior Partner at 20|20 Marine Energy says low prices of oil and bunkers have created a state of "flux" in the shipping industry.

Adrian Tolson, Senior Partner at 20|20 Marine Energy says that low oil prices and cheap bunkers "have created a state of real flux within the shipping industry," increasing risk in the marine fuel supply chain and spreading indecision among ship owners.

Tolson made the comments at the UK Chamber of Shipping's Fueling Operations conference in London, where he explained that not only are the low prices hampering investment for refiners and physical suppliers, and driving increased trader consolidation, but they are also generating complacency among ship owners in terms of fuel procurement strategies and decision making.

"Ship owners have taken their eyes off the ball in relation to future global sulfur regulations," said Tolson.

"While this is understandable to a certain extent, margins have significantly decreased for fuel suppliers and traders, which is stifling investment in infrastructure, and the indecision over future compliance strategies means that refiners won't invest in producing more middle distillates to meet the inevitable shortfall in 2020, the likely date for the 0.5 percent global Emission Control Area (ECA)."

Threat to Bunker Traders

Tolson says that the lower capital requirements required for purchasing bunkers has created an environment that encourages ship owners to go directly to physical suppliers, threatening the existence of traditional bunker traders, whose place is said to be already under threat due to credit risk concerns.

"In the past market of high fuel prices, traders were a real necessity in providing credit to owners and operators; they were effectively bank rolling some types of shipping. With low crude prices, a key reason for being has been eroded and we should anticipate consolidation within this sector," said Tolson.

Tolson also says that lower margins and reduced returns are testing physical suppliers' ability to invest in infrastructure and challenging their capabilities to provide value within the fuel supply chain, which he notes as their "unique selling point."

Physical suppliers with liquidity and cash reserves that invest wisely in their physical operations and asset development, in addition to developing sales and marketing capabilities to meet the current and future needs of a changing market, "have a real opportunity to create significant competitive advantage," argues Tolson.

The Shipping Industry's Future Dynamic

Tolson says the the price of crude in 2020 will be a critical factor in determining the future dynamic of the shipping industry, including the impact that this will have on distillate prices. 

"If the global ECA is implemented in 2020, and if crude, as widely predicted in the industry, increases to $60 per barrel by this date, the key is the effect that this has on the price of distillates, which will be the most widely used compliance solution," said Tolson.

Higher priced distillates will see issues with bunker procurement, lessening profits, and increasing concerns over compliance back with ship owners', says Tolson, noting that it could also lead to a significant increase in the use of scrubbers "as refiners look to sell very cheap heavy fuel oil, a by-product, which can only really be used within the shipping industry."

"The future outlook for marine energy is far from clear, however, it is critical that all stakeholders within the supply chain, from owners and operators, to fuel suppliers and traders consider the impact on their business models and respond. The time to act is now," said Tolson.

As Ship & Bunker reported on Tuesday, a new report from Drewry Maritime Advisors suggests that current low bunker prices have created a new environment in which vessel speeds will increase and smaller vessels may be kept in service longer.