Coronavirus, OPEC effects provide some solace for suffering shippers
The credit-hit shipping industry is drawing some comfort from the collapse of OPEC+ and coronavirus-led demand weakness thanks to cheaper marine fuel costs, with prices for VLSFO in Europe having experienced a greater-than-expected drop, plunging by half since the start of the year.
While demand weakness casts a long shadow out to sea, it is a far cry from the fears of price spikes post IMO-2020 when the sector was rushing to stockpile compliant fuels and shippers were still in unchartered waters with VLSFO.
Prices for VLSFO in Rotterdam plummeted approximately one fifth in January alone, as market participants cited softening demand as well as growing availability. Initial pockets of tight availability at Europe’s bunkering hub in Rotterdam did not appear to persist for long, partly due softened demand-related conditions from IMO 2020 which were further exacerbated by the COVID-19 outbreak. Arbitrage opportunities for VLSFO heading over to the east were curbed fairly early in the year as a result of the virus, leading to ample supply in Europe, and casting further pressure on prices.
This was visible in 0.5% East-West spread paper market, which saw more than 40% fall in value in nearly two months. Measuring the ability to send product from Europe to Singapore, at the start of January, the front month derivative was trading on the Intercontinental Exchange at $35.75/mt January 14, but by March 6 this had fallen to $21.00/mt, showing the reduced financial viability of arbitraging product.
“Everyone was tight on supply and demand was high [at the start of the year], now we have the polar opposite situation. Everything happening with coronavirus is a struggle over all markets [and] the breakdown of OPEC was another kick,” a fuel oil source said. The source added that strong demand seen at the start of the year has disappeared globally, exacerbating the typically quieter period, with refineries looking to cut runs amidst a global slow down.
As the shipping industry continues to weather choppy waters, demand will be the main focus of the market. Following a volatile week for the market, there have been instances of high demand this week as some shippers capitalized on lower prices. However, some shippers are holding out for further decreases and this, amid COVID-19 related restrictions at some ports, is keeping a ceiling on demand.
“We are waiting for the market to come off further,” one ship-owner said. A second bunker source said that the end-user market was quiet amid ongoing geopolitical uncertainty. There seems little chance of Saudi Arabia and Russia mending their fences and returning to a market management strategy any time soon with both producers set to ramp up production in April.
Overall, the fuel oil market has been kept on its toes so far this year. Marine fuel 0.5% FOB Rotterdam barges hit an all-time high on January 3 at $576.25/mt, then were assessed Wednesday at $249.75/mt, a decrease of 57% since the highs in January, S&P Global Platts data shows.