S&B ANALYSIS: Latest on Brent / VLSFO / HSFO Relationship, Bunker Price Outlook as 2022 Sees Record High Marine Fuel Prices

Figure 1

In February when I last reviewed the relationship between Brent, VLSFO, and HSFO, Ship & Bunker's G20-VLSFO index had just hit its highest ever price of $731.50/mt, beating out the previous high of $692.50/mt seen in early January of 2020 during the introduction of the IMO 2020 rule.

That record has since been smashed as crude prices continued to climb, and on June 16, 2022 the G20-VLSFO index had more than doubled year-over-year to hit its current record high of $1125.50/mt.

Prices having been largely falling since then, but with the OPEC+ nations having now agreed to slash production it seemed the perfect moment to take an updated look at the relationship between Brent and bunkers, and what the latest crude price outlooks may mean for bunker prices in the period ahead.

As always, this analysis uses data from Ship & Bunker's "G20" Global 20 Port Averages that track the average price of bunkers in 20 key bunkering hubs responsible for a significant proportion of global volume. For comparisons, Brent has been converted from barrels to metric tonnes (mt) at a rate of 7.53 bbls / mt.

Rising Crude, Even Higher Gains for Bunkers

Like 2020 before it, oil markets for much of 2021 were dominated by measures put in place aimed at tackling the impact of COVID-19.

With oil production scaled back during the pandemic-era, as restrictions eased and demand returned oil prices have been on the rise thanks to tight supply and bullish demand outlook overshadowing any bearish concerns the more conservative market watchers may have had.

2022 therefore began on an upswing and Russia's invasion of Ukraine in February 2022, along with the subsequent sanctions response by Western powers, only exacerbated matters.

As can been seen by Figure 1 both oil and bunker prices during H1 2022 were driven significantly higher year over year, with the G20-VLSFO index reaching that record high of $1125.50/mt on June 16, 2022 - more than double the $543.5/mt that the index stood at a year earlier.

Since then, inflation and interest rate hikes have taken over as the oil traders' main concerns, which joined with fears of a recession, significant cuts to demand forecasts, and the potential for a winter COVID flare-up, have all conspired to bring down oil and bunker prices during Q3 of 2022.

This fall prompted the OPEC+ group last week to cut oil production by 2 million bpd, although due to the fact a number of countries are already producing below quota it is believed the actual supply fall will be closer to 1 million bpd.

It now remains to be seen what impact this, along with US President Biden's promised "consequences" for the move, a proposed Russian oil price cap by Western allies, and the EU's efforts to phase out Russian oil imports from later this year, will all have on crude prices.

The Brent / Bunker Relationship

Perhaps even more notable than the record high prices of 2022 is the much changed relationship between VLSFO and Brent.

Taking big picture view, once we were past the unusual market dynamics of the IMO2020 introduction, up until the start of 2022 VLSFO has been at a reasonably consistent 4% premium to Brent.

Specifically, From May 2020 to early February 2022, VLSFO averaged a premium to Brent of 3.9% and the month of January 2022 it averaged a premium of 4.0%.

That said, for 2021 as a whole this premium as somewhat lower at just 2.3% - a premium of 3.3% during H1 2021 and 1.4% over H2 2021.

2022 has been a different story entirely, with VLSFO averaging a premium to Brent of 12.6%.

Figure 2

As can be seen by Figure 2, the higher the oil price the higher the VLSFO premium, with June and July when prices were at their highest the premium averaging 22.9% and 23.6% respectively.

The premium has since eased back to 11.5% in August, 9.1% in September, and 7.1% during October so far.

HSFO's relationship with Brent has also changed in 2022.

Much of 2021 through Q1 2022 saw HSFO at a discount to Brent of around 20%. Specifically, from January 2021 through to the end of March 2022 HSFO was at an average discount to Brent of 18.7%.

Figure 3

As can be seen in future 3, rising oil prices significantly reduced that discount and in Q2 2022 it narrowed at times to less than 5%.

As oil prices subsequently fell, by the end of September the HSFO discount opened up to more than 25%.

Scrubber Spread

While 2022's high prices will have been of concern to most industry stakeholders, presumably one group taking some positives from 2022 are those with scrubber equipped tonnage.

After the disappointment of 2020's ROI for scrubbers, with the exception of some periods in Q3, during most of 2021 the high / low sulfur spread was above the all important $100/mt mark viewed as a key level for decision makers considering new investment in the technology. Specifically, during 2021 the G20's average spread between VLSFO and HSFO was $111.64.

In contrast, during the first nine months of 2022 the 'scrubber spread' has averaged $243.13/mt.

Figure 4

As can been seen from Figure 4, high oil prices have had a much more pronounced impact on raising the VLSFO premium to crude than it has on cutting HSFO's discount.

Bunker Price Outlook

One of the difficulties in forecasting prices for the coming period is that for 2022 there has been no firm relationship established between Brent and bunkers.

Still, if oil prices remain in the band witnessed in Q3 it seems reasonable to plan for VLSFO to be at a premium to Brent of around 9%, or in a range of 6% to 12%.

Following the OPEC+ production cut Goldman Sachs lifted its Q4 oil price forecast to $110/bbl, which would suggest average VLSFO prices of around $900/mt.

CIBC, meanwhile, believed the cut had already been at least partially priced in by the market and predicted only a "modest net positive for the medium-term oil price."

As it transpires, the jump for prices from last week's cut has been short-lived and after three days of losses Brent is currently around $93/bbl and bunkers around $765/mt.

It is believed that OPEC+ wants prices to remain in the $90-$100 range. If they succeed and the current VLSFO/Brent relationship is maintained then this would suggest VLSFO prices between $740/mt and $820/mt.

Looking ahead to Q1 2023, the bullish Goldman sees oil averaging $115/bbl, which would translate to bunkers at $940+/mt.

But given that oil prices around this level during 2022 resulted in a much higher VLSFO premium to Brent, $115/bbl crude could easily result in a return to four figure bunkers.