ANALYSIS: What is Driving the Narrowing of Global High/Low Sulfur Bunker Prices?

Some of the world's largest ships are being delivered with scrubbers installed. Image Credit: OOCL

Shipowners with scrubber-equipped tonnage can expect to see limited payback on their investments for a while longer.

Average price spreads between VLSFO and HSFO -- a key measure of how much money can be saved by running a scrubber with cheaper HSFO -- have narrowed considerably over the summer as prices for all grades of fuel rose with crude.

The spread between Ship & Bunker's G20-VLSFO and G20-HSFO indices, measuring average prices across 20 leading bunkering locations, hit a new record low of $64/mt on August 22, down from $186.50/mt at the start of 2022 and $229.50/mt a year earlier.

The spread has since widened marginally and hovered in the $80s/mt for most of September.

The effect is particularly pronounced in Northwest Europe, where at Rotterdam the spread is currently around $40/mt, and in the Western Mediterranean, with the Gibraltar spread almost reaching zero earlier in September.

Don't Blame Demand

HSFO's share of global bunker demand is growing, but this is not the primary reason for its narrow discount to VLSFO this year. Image Credit: Ship & Bunker

Scrubbers continue to be delivered with newbuild ships, and are still occasionally retrofitted to existing ones, but the rise in HSFO relative to VLSFO in recent months cannot reasonably be put down to an increase in demand.

As the chart shows, HSFO's share of bunker demand at key ports has been climbing steadily since the 0.50% global marine fuel sulfur cap came into force in 2020, but the change has not been dramatic.

At Singapore, HSFO's share of conventional and biofuel blend demand stood at 33.3% in August, up from 31.3% at the end of last year and from 16.9% at the start of 2020.

For Rotterdam, the Q2 HSFO share was 35.6%, up from 32.1% in Q4 2022 and from 26.2% in the first three months of 2020.

At Fujairah, HSFO in August was at 29% of total demand, up from 23% at the end of 2022 and from 13.2% at the start of 2021 (when the current official dataset was launched).

And in Panama, the July HSFO share was 18%, up from 15.5% at the end of 2022 and from 4.5% at the start of 2020.

Demand in other locations is likely to be increasing at a similar pace -- in other words, a significant rise but unlikely to be a primary driver of this summer's narrow spreads.

Crude and Refined Products Markets

The answer to what's driving the spreads has to be found further up the food chain in the global crude and refined product markets.

The main thing to note here is crude production cuts from Saudi Arabia and Russia aimed at stabilising global markets.

The two OPEC+ coalition members have both gone beyond the output cuts agreed as part of their membership of that grouping, and have recently extended their voluntary cuts to at least the end of this year.

The crude output these countries have cut has been replaced by lighter oil from elsewhere, on average with a lower yield of fuel oil when refined.

Beyond that, some of the effect is seasonal, with greater need for air conditioning in Saudi Arabia and elsewhere in the Middle East over the summer meaning more fuel oil is consumed for power generation.

And all of this comes on the back of longstanding tightness in global middle distillate markets, meaning more fuel oil is put through hydrocrackers and other refinery units to maximise distillate yields.

What's Next?

In the short term, little change can be expected in global sulfur spreads until Saudi Arabia and Russia ease off on their production cuts.

But with Brent crude futures now approaching $100/bl again, these countries may feel less need to support the market with reduced output, particularly if the current high prices look like driving down demand.

The heightened summer demand season for fuel oil-fired power generation in the Middle East is coming to an end, but global middle distillate markets are set to remain tight, particularly with Russia now halting diesel exports.

But over the longer term, shipowners should look out for the possibility of what happened in Gibraltar in September -- when limited competition among suppliers helped send the sulfur spread to near zero -- becoming more commonplace.

Demand for biofuel bunker blends is likely to grow significantly over the next few years, particularly with the EU emissions trading system starting to hit shipping, and suppliers will need to start dedicating storage capacity and delivery infrastructure to these fuels if they want to play a part in this growing market.

If they calculate that biofuel demand is growing more quickly than HSFO, and with better margins, then they may start shifting to biofuel supply at HSFO's expense.

That in turn would turn HSFO into more of a niche product at some ports, allowing the remaining suppliers to offer much narrower discounts to VLSFO because of limited competition.

The key for shipowners, as ever, will be planning ahead, with those able to lock in wider spreads in advance through contracts and other methods being able to see the biggest payback on their scrubber investments. Those that arrive at the last minute seeking a spot HSFO delivery at an unfamiliar port should not expect a lucrative discount.