Compliant Bunker Fuels Long-Haul Charters A Major Risk
The IMO2020 rule for the use of low-sulphur fuels from the beginning of 2020 is expected to offer a boost in the product tanker market, triggering demand for more cargoes. However, a lot is still dependant on if “the price is right”. In its latest weekly report, Gibson said that “over the past few weeks, the West – East High Sulphur Fuel Oil (HSFO) arbitrage has firmed substantially from a fairly range bound $30/tonne to a bullish $46/tonne, briefly touching a four year high of $50/tonne last week. Several factors are behind this sudden widening”.
According to the shipbroker, “arbitrage arrivals from the West into Singapore have been lower in recent months, tightening regional HSFO supply. Peak demand season in the Middle East has also reduced flows into Asia, with strong pricing economics for shipping fuel into the Middle East, drawing cargoes from the West and potentially lowering flows into South Asia. Furthermore, less Iranian and Venezuelan fuel oil also appears to be finding its way into the Asian market, contributing to the regional tightness. At the same time, the recent attacks on shipping in the Middle East appears to be pushing some bunkering activity away from Fujairah into the Singapore market, supporting regional HSFO demand”.
Gibson added that “however, perhaps the most significant factor is the pending IMO2020 regulations. Whilst on paper, the arb for moving HSFO from the West to Singapore should work, particularly when considering the weakness in regional VLCC freight rates, moving large cargoes on the route could prove problematic. Given that a standard Rotterdam – Singapore voyage takes 38 days (basis 13 knots via the Cape), cargoes fixed today (which may not load for a few weeks) would not arrive in Singapore until September. With many expecting owners to start switching to compliant fuels from late Q3/ early Q4, HSFO demand may fade by the time the cargo arrives as the switch to compliant fuels gathers momentum”.
The shipbroker also noted that “storage also has to be considered. With many preparing tanks to store complaint fuels, storage for HSFO is likely to be constrained. Floating storage is of course one option, however this in itself will incur costs. Other considerations include forward pricing. Unsurprisingly, the forward curve for HSFO is steeply backwardated through to 2020, losing over $105/tonne in value between now and December, making any forward trade difficult to place and storage uneconomical”.
To summarise, whilst the price spread between fuel oil in Europe vs. Asia would seem to support arbitrage flows, the pending specification change is preventing an uptick in trade on the route. In short, prompt demand for HSFO may be strong, but forward demand is soft. Some shorter haul trading opportunities may exist, but the longer haul trades look set to remain a challenge. Low sulphur is however a different story, with trading activity of compliant fuels steadily increasing. However, with uncertainty around supply, demand and pricing, trading large volumes of compliant fuels over long distances has its own challenges”, Gibson concluded.
Nikos Roussanoglou, Hellenic Shipping News Worldwide