S&B VIEWPOINT: Don't Expect to See Negative Bunker Prices Any Time Soon

The May WTI price collapsed on Monday as oil traders ran out of storage options. Image Credit: Bloomberg / Ship & Bunker

While US crude prices have dropped into negative territory in an unprecedented slump this week, bunker purchasers should not hope for their suppliers to start paying them to take away fuels any time soon.

The May WTI contract collapsed late on Monday in something akin to a cardiac arrest for America's oil market, settling at a negative price for the first time in the benchmark's history at -$37.63/bl.

The June contract has also dropped sharply, and European Brent crude futures have followed them lower on Tuesday.

Shipowners facing their own slump in demand would be forgiven for wondering whether bunker prices might follow crude into negative territory in the coming weeks -- but that remains highly unlikely for now.

Unstoppable Production

"The situation with crude is driven by no storage, unstoppable production and very limited locations for physical delivery," Adrian Tolson, director of BLUE Insight, told Ship & Bunker Tuesday.

"No-one in the bunker supply chain has that sort of inventory or supply-chain pressure."

Monday's crude collapse in the US was driven by the looming expiry of the May WTI contract, with those left holding the paper on expiry needing to take delivery of the oil at Cushing, Oklahoma.

With inland storage space at Cushing and pipeline capacity towards the US Gulf both running perilously low for May, crude traders holding the May contract this week were left with the risk of having nowhere to put the oil upon delivery, leading to some being willing to pay for others to take it off their hands.

A similar situation is unlikely to play out for refined bunker fuels, Tolson said. But he pointed out negative prices for marine fuels at least theoretically possible.

"When we were worried about IMO 2020 -- the good old days -- and didn't know where all the HSFO would go, we did hypothesize that some HSFO might go to negative prices at the refinery door; that a refiner would just have to keep producing and would have to pay the market to dispose of the residual fuel production," he said.

"Of course at that time, no-one hypothesized that this would ever mean negative bunker prices."

Logistics Cost

Negative delivered bunker prices are particularly unlikely because of the extra delivery and infrastructure cost on top of the underlying cargo price.

There has been one case this year where bunkers were sold at near zero, when shipowners were in a hurry to rid themselves of debunkered high sulfur fuel oil ahead of the non-compliant fuel carriage ban coming into effect at the start of March.

One shipowner in February told Ship & Bunker that suppliers in some cases were paying as little as $1/mt to buy back debunkered HSFO from shipowners because of the looming deadline.

But in that case the low nominal price was in return for the free use of barges for the debunkering operation, which would otherwise have cost the shipowner several hundred dollars per hour. 

Short-Term Phenomenon

Robin Meech, managing director of consultancy Marine and Energy Consulting, told Ship & Bunker he expected the negative oil prices to be a short-term phenomenon.

"Oil prices will go back positive; oil production and refineries are shutting down, everybody is banking on this," he said Tuesday.

But he pointed out that there could be specific circumstances in a volatile market where bunker prices turned negative.

"If you're going out of business and want to empty your tanks, you might actually pay somebody to take it away," he said.

He also noted that, were bunker prices to turn negative, some of the current features of the bunker market like the credit provided by suppliers and the bunker adjustment factors charged to shippers by container lines might see their terms reversed.

"With a negative price, shipowners would have to lend suppliers money -- or would they insist on cash on delivery?!" he said.