Move to 1%S bunker fuel may tighten RMG 380 inventories: trade
Thursday, 05 July 2012 | 00:00
The move to 1%S RMG 380 fuel specifications in the North American Emissions Control Area on August 1 may tighten inventories of RMG 380 and other bunker fuels as suppliers juggle limited space with increasing selection for shipowners and buyers, according to market sources.
The primary concern associated with the implementation of the new ECA specs has been the cost involved with moving to low sulfur fuel oil as less and less LSFO is being produced. However, market sources say, the spec change has also had suppliers carrying more types of bunker fuel, including cheaper-to-make RMK 500 selections, which has begun to put pressure on existing infrastructure.
"No new tanks are being built for bunkers, so any tankage will be cannibalized from other products," explained a fuel oil trader who trades in both the Gulf Coast and Atlantic Coast.
The end result will be that working inventory of 3.5%S RMG 380 will fall as tank space is taken to make room for needed volumes of 1%S RMG 380, another fuel oil trader who trades on both coasts said.
"So at the rack, just like gas, you're reducing working inventory," said another fuel oil trader who also trades on both coasts. "It's not just the barrel switch out; it's the reduced amount of tankage. That will serve to depress HSFO. Instead of having 2 or 3 million barrels, maybe reduce it 20%."
The problem for suppliers hinges on how many varieties bunker fuel they want to be able to offer. The expense of buying low sulfur bunker fuel oil - which trades at between a $90/mt and $100/mt premium to RMG 380 on the Atlantic Coast and as much as a $200/mt premium on the West Coast - as buyers looking to manage costs anyway they can. That can include running higher viscosity bunker fuel such as RMK 500 or 700.
"Suppliers are going to have to decide to dedicate tankage to RMK or 1.0%S RMG," an Atlantic Coast bunker trader. "If you do both, 3.5%S RMG availability will be tight."
RMG 380 VALUES
Counter-intuitively, the loss of tankage space for 3.5%S bunker fuel in favor of 1.0%S bunker fuel may pressure RMG 380 values downwards, sources say, as it forces suppliers to use their remaining space more efficiently.
"It will make a supplier turn their high sulfur tanks more 'often,'" a second Atlantic Coast bunker trader said. "Increased tank turns should effectively lower operating costs," which would be absorbed by the supplier for their profit margin or just as likely create room for high sulfur bunker fuel to be pushed down some more."
On the other hand, suppliers who focus on just a few specifications will likely see little effect, particularly if that focus is on low sulfur RMG 380, a Gulf Coast bunker trader explained.
"There's going to be no more total demand, so 1.0%S gains will offset 3.5%S losses," he said. "As tankage space is taken it is covering 3.5%S space which isn't being used."
Ultimately, sources say, the effect on a given supplier will be a result of how suppliers estimate market demand for low sulfur bunker fuel and how much space they are willing to a lot to reach that market.
"Does one feel the premiums that can be charged for a somewhat relatively 'unknown volume' at this point justifies taking a tank out of high sulfur service and putting it into low sulfur service?" the second Atlantic Coast bunker trader said. "[Suppliers] will have to make a sound business decision as to tankage allotment."
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