S&B ANALYSIS: Latest on Brent / VLSFO / HSFO Relationship, Bunker Price Outlook as Low Sulfur Premium Nears 2-Year High

Figure 1 - Bunker Prices in the IMO 2020 Era

Climbing crude prices have naturally sent bunker prices in 2022 higher. As VLSFO in Ship & Bunker's G20 index hit a record high Friday, I took an updated look at the relationship between Brent, VLSFO, and HSFO, and what the latest crude price outlooks mean for bunker prices in 2022 and 2023.

As always, for this analysis I have used data from Ship & Bunker's "G20" Global 20 Ports Average that tracks 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 at a rate of 7.53 bbls / mt.

Looking through the latest numbers, excluding the extraordinary market dynamics of the initial few months of 2020 and the introduction of the IMO 2020 rule (read more here and here), the top level take-homes are:

• The VLSFO/Brent relationship continues to remain reasonably consistent with VLSFO prices at around a 4% premium to Brent.
• The HSFO/Brent relationship continues to remain reasonably consistent with HSFO prices at a discount of a little under 20% to Brent.
• As a result of the consistent VLSFO/HSFO/Brent dynamics, bunker prices have risen proportionally with the rise in crude, and the so-called 'scrubber spread' (the premium for low sulfer VLSFO bunkers vs HSFO) has widened.

Rising Bunker Prices Continue to Track Crude

As has been the case historically, predictions of where crude prices are heading continue to give a solid indication of future marine fuel prices.

Excluding the introduction of IMO 2020 and the onset of the COVID-19 pandemic (January - April 2020) Figure 1 above clearly shows that VLSFO and HSFO bunkers have settled into their respective consistent tracking of crude prices.

From May 2020 to date, VLSFO has averaged a premium to Brent of 3.9% and as at Friday Feb 4 has a 4 week rolling average premium of 4.1%.

During the same period, HSFO has averaged a discount to Brent of 16.6% and as at Friday Feb 4 has a 4 week rolling average discount of 18.6%.

Figure 2 - VLSFO % Premium to Brent

Figure 3 - HSFO % Discount to Brent

Looking at Figure 2 (VLSFO % Premium to Brent) in late November last year a pronounced spike in the daily numbers to a 10%+ premium for VLSFO can be seen, along with a corresponding dip on Figure 3 (HSFO % Discount to Brent) to a discount of around 10% for HSFO vs Brent. This corresponds with a sharp, double digit drop in crude prices as the market reacted to news of the Omicron variant of the coronavirus.

Widening Scrubber Spread

In dollar terms, on Friday Feb 4 the G20 index recorded its highest ever VLSFO price of $731.50/mt, For reference, until recently the previous high for VLSFO was $692.50/mt seen in early January during the introduction of the IMO 2020 rule.

On Friday the G20 HSFO price also recorded its highest levels in the IMO 2020 era of $563.50.

This put the so-called 'scrubber spread' (the premium for low sulfer VLSFO bunkers vs HSFO) at $168/mt - the highest it has been since February 25, 2020, a period of almost almost 2 years.

Figure 4 - VLSFO $ Premium to HSFO (the 'scrubber spread')

This is no doubt good news for owners of scrubber equipped tonnage, with a high / low sulfur spread of $100/mt viewed as a key level for decision makers considering the technology.

How this translates for manufacturers into orders for new scrubbing units remains to be seen, and Wärtsilä are among the key players in the exhaust gas cleaning systems (EGCS) space to report low orders despite the healthy spread.

The issue is that with many shipping segments witnessing high earnings and heavy demand for tonnage, there is little incentive for dry-docking activities such as scrubber retrofits.

Still, newbuilds are a separate case and as seen with the January launch of the 24,000 TEU boxship Ever Alot, the case for fitting scrubbers on new tonnage - particularly the world's largest ships - continues to look solid.

Highest Bunker Prices Ever?

VLSFO may be at a historical high, but with it being an IMO 2020 specific product and thus not existing prior to this era, it raises the question of whether bunker prices overall are at their highest levels ever.

The short answer is no, but they are certainly getting close.

When considering the answer to this question we must take into account that IFO380 was the dominant bunker choice prior to January 1, 2020 and VLSFO afterwards

Keeping in mind also that Ship & Bunker's G20 index has just under a decade of data, having begun on March 1, 2012, there were many occasions during March 2012 and several during April 2012 when prices were higher than Friday's record VLSFO price of $731.50/mt.

The highest value of the combined HSFO/VLSFO G20 index was the IFO380 price of $756.00/mt witnessed on March 14, 2012.

Brent during this period was a little over $120/bbl.

The only other time in history that bunker prices may have been higher than this was when crude famously hit $147.50 bbl in July of 2008, and over that month averaged $132.72/bbl.

Revised Crude, Bunker Price Outlooks for 2022

In October I said that based on the at-the-time crude price outlook from Goldman Sachs that 2022 could see VLSFO priced at $675/mt to $750/mt by year end.

We are clearly already close to the upper limit of this prediction.

Barclays at that time had a more conservative outlook of Brent at $77/bbl for 2022, which would have translated into average bunkers over the year of $580/mt.

Since then, Goldman has lifted its 2022 full year Brent outlook to $96/bbl, which if the now established Brent / VLSFO / HSFO relationships are maintained, would mean average prices in 2022 of around $752/mt for VLSFO and $578/mt for HSFO - a high/low spread of $174/mt.

Barclays have likewise upped their outlook, and now see Brent at $85/bbl for 2022. This would translate into average prices over the year at $683/mt for VLSFO and $512/mt for HSFO - a high/low spread of $171.

Looking ahead to 2023, Goldman sees Brent at $105/bll which would translate into VLSFO at $822/mt and HSFO at $632/mt - a high/low spread of $190, tantalizingly close to the $200 premium widely predicted in the run up to IMO 2020.