Aon Launches Bunker Price Hedging Product

New York-listed insurance provider Aon has launched a new insurance product aimed at shipping.

The coverage will be activated when the cost of fuel rises above an agreed limit, the company said.

"The policy will cover the difference between the agreed price and the higher price, paid out monthly, to help companies manage their fuel cost exposure and avoid significant spikes in market price," it said in a statement.

The policy is backed by AAA-rated credit insurance.

Hedging products for the bunker industry are nothing new, and products like Aon's that offer Caps have been been popular with buyers that want to retain some exposure to the market.

Unlike Swaps that lock in a particular price over a period, Caps leave the buyer exposed to price movements but only up to a maximum price point.

This is beneficial for owners / operators who want to ensure bunkers costs do not rise to the point of making operations unprofitable, or for those simply looking to protect against price spikes. 

The current demand depression from COVID-19 has resulted in much uncertainty for the market, particularly as it is unclear how and when lockdowns will ease and what the resulting impact on demand will be.

Once they do, the potential for price spikes from supply shortages as well as rising bunker costs overall is very real.

Indeed, Goldman is already predicting Brent at an average $65/bbl this year, suggesting VLSFO in 2021 will be priced at an average of $600/mt vs the average $376/mt for VLSFO enjoyed in 2020.

Prices are also already rising rapidly, with Ship & Bunker data indicating the cost of VLSFO at major hubs has risen 31.5% over the last six months.