Bunker Prices: Don't be Fooled by What you See at the Moment

Adrian Tolson, BLUE Insight Lead, BLUE Communications. Image Credit: BLUE Communications

IMO 2020 is upon us and the most striking impact so far has been VLSFO's "runaway" prices and its narrowing (even reverse spread!) to MGO. It is well understood that the market will face some unique challenges during this period of transition to the new global 0.50% sulfur cap, the question is, to what extent is this impacting bunker price levels and what can we expect to be the new normal to be once the market settles?

In short, I believe the future is going to look very different.

Bunker Prices in the Run Up to 2020

MGO bunkers have come under some upward pressure but generally the diesel market has been less impressed by IMO 2020, preferring to follow the slow strengthening of crude in Q4. HSFO, meanwhile, has shown stability, the realities of its future being offset as inventory and supply options become more limited.

In the run up to 2020, global prices (and availability) port to port have shown extreme volatility but the major supply ports give us all a better indication of where we are going.

Rotterdam, generally the most price passive and well supplied of the global bunker markets, clearly shows these trends as we can see in Ship & Bunker's Q4 retail bunker numbers. The port has seen its prices rise alongside crude with an obvious narrowing of the spread between VLSFO and MGO.

Singapore has not been as passive as Rotterdam. It is a natural import market and a more extreme reaction can be seen here with VLSFO and even MGO rising sharply in recent weeks, with the retail bunker price spread between the two products being largely eliminated.

So, are these the retail bunker prices and spreads we can expect in the future? I would say don't be fooled by what you see at the moment! 

Many of the prices in these two ports are being heavily influenced by panic and short term transitional logistical issues, and it may be necessary to look at bulk wholesale prices in these ports for a reality check.

It has been very hard to understand the Singapore bunker prices as we closed 2019. Spot VLSFO prices in Singapore for retail bunkers were near $730/mt, a massive premium to the bulk wholesale prices of approximately $90.

MGO was equally distorted with retail bunkers selling at a price below VLSFO of $715/mt which was still at a huge premium of more than $100 to bulk wholesale prices.  A market turned on its head by panicked buying of short term supply.

Rotterdam has dealt with the transition is a more sober fashion. Retail bunker VLSFO ended the year at close to $590/mt a premium of only about $40-50 above bulk wholesale, albeit a considerably tighter premium than early in the last quarter.  Rotterdam MGO stood at close to $610/mt on December 31st, against a wholesale bulk price of close to $600/mt. Rotterdam appeared altogether unexciting.

And what about HSFO? Both markets saw retail bunker and bulk wholesale prices relatively flat as the year ended. Singapore was a little tighter and their premium was substantial but there was no real sign of a meteoric price decline for a grade that was about to disappear as an option for more than 95% of ocean going vessels.

The Future

The future is going to be very different. Singapore, and many other import dependent ports, will calm down and slowly establish regular premiums to competing or key supply chain ports. MGO will not remain cheaper than VLSFO, logic maintains that VLSFO will get increasingly cheaper as more of it is available and as more companies and more barges are delivering it.

VLSFO in Singapore will likely never be as cheap as it will be in Rotterdam, where it will sell at a much deeper discount to MGO. The challenge is to predict how long this will take to happen not only in these ports but in other even more disrupted ports around the world. New supply chains will take time to develop.

Perhaps the greatest unknown is what will happen to the price of HSFO. Bulk wholesale HSFO will logically get cheaper in major ports. End of year bulk wholesale prices were around $250/mt in Rotterdam and $300/mt in Singapore and this will likely track down once refinery inventory builds   Retail HSFO bunker prices are a whole different story.

First of all, I am not sure anyone is planning on buying HSFO bunkers on a spot basis anymore? From what has been reported almost everyone who has a scrubber has written a term contract to buy HSFO and if they made the right call, they did this on a formula linked to bulk wholesale. 

Secondly, what ports will have consistent HSFO bunker supply from now on? Frightening Q4 stories of whole geographical regions with no inventory of HSFO may become the norm as this year passes.  With very few spot transactions, in very few supply ports, most HSFO spot pricing will be mystery, allowing a spot seller to charge almost any price they desire for a spot requirement. Life with a scrubber and no supply contract will be very hard in 2020.

2020's pricing impacts are just being felt, but what is being felt right now is not the reality as the months and years progress. I don't think those of us who made predictions got this all wrong.  

VLSFO will be by far the best choice for those without scrubbers and overall price and premiums will drop.

MGO will be the most expensive and least favoured alternative, unless there is no choice.

HSFO will be subject to a massive premium between wholesale and retail prices. Those who have scrubbers and no supply contracts may have real problems in getting reasonably priced supply or any supply at all. Having said this, logically refiners have an incentive to find customers, so perhaps it is not too late to find HSFO supply?