COVID-19 has seen a large demand induced reduction in:
Supply of manufactured goods
Supply of raw materials
All have had a massive impact on global shipping and different sectors of the market. The most effective way to look at the market currently is to assess the associated risks. As a broker it is our job to give a balanced assessment to both the owner and the supplier.
It is a brave person who takes on volume-based contracts at the moment due to changing demand, routes and regulations in individual ports. Those that have existing contracts need to manage expectations carefully with suppliers. With a spot market heavily under pressure and cargo/bunker premiums collapsing, existing contracts remain one area where suppliers will be keen to keep rolling.
I would suggest looking at other ways of locking prices whilst having more flexibility on lifting port. Many suppliers are pricing their product either off of 0.5% indexes or more commonly MGO indexes as they have more liquidity. There are very simple risk management techniques which allow the buyer to achieve protection without rigidity in port/volume.
Scrubber fitted vessels
The exception is the above and with shrinking avails of HSFO there is a clear case to lock volume away. The added complication is the small current spread between HSFO and 0.5% which makes the payback time longer for those invested in this technology. It is a fine balance between securing the product and being overcommitted.
A good credit manager is worth his/her weight in gold at the moment and credit insurance companies are also adding pressure over which counterparties they will still cover.
Each sector of the shipping market reflects different risk profiles, with some facing reduced schedules and operational issues. For the supplier/trader the key risk is most likely FFP contracts in hand and how to manage any changes in volumes and potential defaults by clients. Whilst falling prices have been welcomed by many, it has left a number of buyers and sellers exposed in a big way.
The focus for the buyer is to extend the reach of their available credit in case an existing counterparty changes credit policy and the buyer is left short.
From our side we have seen demand increasing during March and this is a reflection of a number of owners wanting to access additional suppliers direct using the broking model.
I need to mention pricing but only in the context of a forward curve which is in steep contango in both MGO and Crude pricing. It is prudent to take advantage of low prices in the front couple of months but with risks associated with supply and demand is a brave buyer that takes a longer position.
The Bunker Market
In terms of the bunker market it operates slightly differently to other markets as is not one homogenous product with overly strict product parameters. In essence, you can blend VLSFO in various ways. So, whilst storage is close to capacity for all products shipping remains one of the only reliable outlets. This why we have seen the viscosity of VLSFO reduce in recent months as more distillate blending has taken place instead of residual fuel from LS crude.
A price spike may occur once restrictions are lifted and people start driving and flying as the existing stocks will have alternative outlets. We are also seeing reduced refinery runs so will be interesting to see if any rising demand will cause an issue in the future. My guess is with stocks high there will be enough time to adjust.
The availability of lots of blend components for VLSFO has been one of the factors in the rapid shrinking of the spread between HSFO and VLSFO.
The market remains unpredictable and in flux dependent upon a virus. Like most of us stuck at home and working the key is to take short periods at a time and minimize the risks. The market remains highly susceptible to tweets and rumour which makes forward planning difficult.