Scrubber Investors: Should I be Worried About HSFO Price and Availability?

Paul Hardy, NSI

I wrote in my last Q4 market outlook report before the Saudi attacks: "An imbalance in supply and demand has caused price spikes in a number of markets with barging becoming tight and premiums soaring for prompt supply.

The market remains heavily backwardated into 2020. For those invested in scrubbers HSFO has collapsed into Q1 2020. It needs careful monitoring but never before in the last 30 years could you buy fixed price at such a discount to the current spot market. So why not kill 2 birds with 1 stone and lock out both the logistics and the price."

The driver for massive price spikes has been the imbalance between supply and demand whereby, storage and barging has been switched to LSFO whilst demand has remained for HSFO. The price spikes have been felt the most in those markets which are reliant on imports. This is due to the backwardated market and the loss in value of cargo for long voyages. The traditional arbitrages are closing. This means we have seen massive spikes and avails problems in crucial bunker hubs such as Singapore and Panama.

In terms of scrubbers there have been a number of strategies employed to manage the risk.

1. Lock the spread

Many companies have looked at locking the spread between HSFO and 0.50%. In the absence of liquidity in the 0.50% indexes many have opted for fixing against MGO. The problem with this strategy is it relies on hedging the spread between the cargo indexes. It does not hedge the risk of the bunker premium which has reached all time highs the last weeks in some markets.

Secondly, if you lift outside of the main hubs will you get the product? If not you will have hedged the spread but will have to lift 0.50% negating the efficacy of the hedging.

2. Lock forward  fixed price

This has been attractive due to the large backwardation. The opportunities for this have been diminished due to the large spike in barging premiums. Barging companies are eyeing continued large profits going into 2020 and so are reluctant to undersell their capacity. This still leaves refiners with the need to sell their HSFO so will come down to how much they are willing to discount in order to secure the product. As most refiners are not in control of their own barges, without guaranteed offtake it is very difficult to know what barging tonnage to charter in. In summary, it is a great time to be a barge owner. Following the Saudi attacks most barging companies are adopting a wait and see attitude and so there are less FFP offers on the market.

3. Lock average of month contracts

This is a sensible option as the owner can trigger fixed price equivalents by buying swaps. This now suffers from the same issue i.e. rising perceived barging values and drop off in number of companies offering in the last 2 weeks.

4. Wait and leave on the spot

The risk is simple- will you be able to source the product? Main ports possibly but in minor ports our research on www.2020planning.com points to the negative. It simply comes down to a choice for the barging company:

1. Supply products with high demand, 'flattish' forward curve i.e. 0.50% and MGO
2. Supply HSFO with an estimated 85% drop in demand and the strongest backwardation ever seen in the bunker market

Of course there is a logical choice- no one wants to be stuck with product in tank that loses value every day. I wrote of this dynamic back at the start of 2018 and is playing out as expected: Read More: IMO2020 Switchover Dates and the Effect on Demand, Storage and Liquidity

5. Bunkerwire contracts

This strategy will secure the product but in no way protect the owner for fluctuating barging costs. It is important to note that always in small volume markets there is a tendency for price reporting to be less accurate. I will say no more……….

Risk

The most risky strategy is thus to do nothing. Each of the above scenarios carries significant basis risk. It is a case of understanding the risk and managing effectively.

The biggest risk is for those with a small number of ships with scrubbers on board who are further constrained by lack of volume to execute longer term supply contracts. The natural solution would be to pool with others who do.

The barging companies are in a strong position and some are still opting for a wait and see mentality with some of their tonnage. If they can charter out to refiners at a large premium and have no liquidity and product sourcing issues then they will. They are being spurred on by the huge price spikes and should make hay while the sun shines. Will this continue though? I think not. As vessels switch from HSFO to 0.50% demand for HSFO will decrease and the supply squeeze should relax. For all buyers of HSFO expect though massive swings over the next 2 months. December may well still see the 'dumping' of left over product in tank by those suppliers without a tight logistical plan.

In summary I still go back to my notes from the speech I made at the Baltic Exchange back in February 2018:

• Lock HS contracts going into 2019 and hedge them to take advantage of the backwardation
• If you have scrubbers fitted or are planning- the product will be cheap but check to see if you can get it delivered.
• Lastly, speak with your bunker broker who will advise you on all of the above.
• And finally………….consider buying bunker barges!