IMO2020 ANALYSIS: Cheap Fuel Oil in 2020 Will Not Guarantee Cheap HSFO Bunkers

IMO 2020 is expected to destroy some 95% of marine's HSFO demand. File Image / Pixabay

Conventional thinking suggests that the IMO 2020 rule will cause the price of fuel oil to plummet, dragging down the price of HSFO bunkers with it.

This is because all indications are that when the global 0.50% sulfur cap on marine fuel comes into force on January 1, 2020, the overwhelming majority of vessels will comply by switching from HSFO to MGO or VLSFO max 0.50%.

This will destroy some 95% of marine's HSFO demand, which today stands at around 250 million mt/year, and create an equivalent upswing in MGO demand.

The basics of supply & demand economics say the price will then fall for fuel oil and increase for distillates, and there is no reason to think anything other than this will happen.

Indeed, this dynamic is one of the fundamental arguments for using a scrubber + HSFO to comply with the new cap: buy a scrubber and continue burning cheap HSFO bunkers that will be even cheaper come 2020.

The problem is that cheap fuel oil will not guarantee cheap HSFO bunkers. In fact, it is not unreasonable to think that,  relative to crude, in the post 2020 market HSFO bunkers will be close too or even more expensive than they are today.

There are several reasons for this.

Logistic Margin

When demand starts switching to MGO the majority of supply infrastructure will also switch. With so little demand, it follows that maintaining HSFO bunkering infrastructure - including HSFO barges, storage, pipelines, blending etc - will become a lot more expensive.

That cost could be so high as to make it untenable to maintain HSFO supply in some ports, with Olivier Jouny, Managing Director, Total Marine Fuels Global Solutions, telling Ship & Bunker back in January that particularly in smaller ports, "choices will have to be made" as to where HSFO supply will continue.

"Essentially what will happen is the logistics margin for HSFO supply will become much bigger. There will be a huge spread between the wholesale and retail fuel oil markets," says 20|20 Marine Energy's Adrian Tolson, who recently discussed the matter with Ship & Bunker.

In addition, because so few vessels will have scrubbers - Tolson suggests less than 1,500 before 2020 equating to less than 5% of total bunker demand - variance in HSFO demand and infrastructure cost between ports will become more pronounced.

Ship & Bunker data indicates IFO380 today has a spread of around $40/mt across the world's key bunkering hubs. "This will very likely become much wider in the post 2020 market," Tolson says.

Inelastic Demand

Another pricing issue caused by low HSFO demand will be inelastic demand.

"Today a supplier can drop their price if they need to move product. But if they do this in the post 2020 market there will be very little, if any volume to attract," says Tolson.

A number of suppliers including World Fuel Services and ExxonMobil have already advised owners and operators looking to use scrubbers in 2020 to lock up their volume now so they can ensure future supply.

But given the above dynamic it is incredibly difficult at this stage to understand what represents a good future price for HSFO bunkers.

It is also worth keeping in mind that the market will start to see pricing volatility from Q2 next year, and certainly by H2, as buyers start preparing to switch fuels .

While less of a problem for the biggest bunkering ports, suppliers operating in ports with lower demand will be faced with a tricky logistical exercise in maintaining enough HSFO to meet demand up until the end of 2019 without getting stuck with it in the new year.

In some ports where supply dries up early this could well result in HSFO attracting a healthy premium as buyers compete to lift the last of the cheap bunkers. At the other end of the spectrum, some ports could see heavy discounts for HSFO as suppliers make last ditch efforts to shift product very few will want in 2020.

"Over the next 18 months , understanding where to lift bunkers and what to pay for them is going to get increasingly difficult," says Tolson.