MARINE FUEL 0.5%: Markets adjust to new norms in first month of 2020
Global markets for the 0.5% sulfur marine fuel market looked to adjust to new low sulfur landscape in the first full month of 2020, the much-anticipated transition date for the sulfur cap for marine fuels moving from the previous 3.5% to the current 0.5%.
The Asian Marine Fuel 0.5% crack spread kept higher than 10 ppm gasoil and 92 RON gasoline throughout January on the back of supply tightness.
The February Marine Fuel 0.5%/Dubai crude swap crack spread averaged $25.93/b in January, while 10 ppm gasoil/Dubai spread averaged at $13.13/b and 92 RON gasoline at $6.02/b, S&P Global Platts data showed.
Marine Fuel 0.5% supply was tight because Singapore is expected to receive only 2 million-2.5 million mt a month of low sulfur fuel oil in the first quarter, while Singapore’s monthly bunker demand is about 4 million mt/month. “Stocks of low sulfur fuel oil are steadily declining,” said a Singapore-based fuel oil trader.
The strong prices also were supported by high delivered bunker prices, market sources said.
Premiums of Singapore Marine Fuel 0.5% delivered bunker to Marine Fuel 0.5% cargo jumped to an all-time high of $93.45/mt January 10 because of tightness in barge schedules and loading schedules, market sources said.
The premium averaged at $71.10/mt in January, compared with $42.99/mt in December, Platts data showed.
Meanwhile, the premium started weakening in second-half January, as shipowners had covered January requirements. Bunker demand also declined because of the Lunar New Year holiday.
“In the lead-up to the Lunar New Year, demand came off because shippers have already secured their necessary requirements and [are] preparing for the holiday,” a Singapore-based bunker trader said.
Following the Lunar New Year holiday, market sentiment has remained cautious on the back of the coronavirus outbreak. “It’s hard to tell if the market is affected by the coronavirus outbreak because demand has come off quite a bit before Lunar New Year,” said a second bunker trader.
Although delivered bunker premiums over cargo weakened, the crack spread of Marine Fuel 0.5% cargo has been holding higher than 10 ppm gasoil and 92 RON gasoline. This led Asian refineries to produce more low sulfur fuel oil with maximum 0.5% sulfur.
South Korean and Taiwanese refiners have cut operating rates at residue fluid catalytic crackers and fluid catalytic crackers on weak gasoline margins and are diverting feedstock for such units to make more low sulfur fuel oil after LSFO prices surged.
In addition, the Asian LSFO market saw new suppliers of low sulfur fuel oil from India, such as Mangalore Refinery and Petrochemicals Ltd, and Bharat Petroleum Corp. Ltd on the back of strong LSFO prices.
Some 38,000 mt traded in the Market-On-Close assessment process during January for the 0.5% fuel oil FOB Rotterdam barges, up from 14,000 mt in December.
The spread between 0.5% marine fuel and 3.5% fuel oil FOB Rotterdam barges narrowed toward the end of January as the market adjusted to the new regulations. The differential between the two products narrowed 37.5%, to $196.25/mt January 31 from $314.25/mt January 2.
As 0.5% S marine fuel demand continued to outshine that of 3.5% S fuel oil, the latter fuel found a new demand center from the US Gulf Coast as a coker feedstock, which supported the front-month high sulfur fuel oil crack.
Looking downstream, bunker prices have fallen 20%, to $461/mt at the end of January from $578/mt January 2. In part, the declines in 0.5% marine fuel are because of declines in front-month ICE Low Sulfur Gasoil futures, sources have said.
At Europe’s largest bunkering hub, Rotterdam, the spread has fallen 40.5% to be assessed at $176/mt on January 31, reaching its lowest levels since October 3, from $296/mt on January 2, S&P Global Platts data showed.
In the Mediterranean, the spread has fallen, but by a slightly lesser extent. The differential between 0.5% and 3.5% bunkers, delivered Gibraltar, was assessed at $192/mt on January 31, down 37% from $305/mt January 2.
“The price levels are now declining towards a point of stabilization,” BIMCO’s chief shipping analyst Peter Sand said in an emailed statement in January.
Nevertheless, exhaust gas emissions cleaning systems, or scrubbers, are still a commercially viable option, Sand said. “Despite the lower spread, the investment payback period for a scrubber is between a half year to one-and-a-half years, depending on the cost of the scrubber and daily consumption, which allows for substantial fuel oil cost savings for scrubber-fitted ships.”
In theory, a wider bunkers spread between the fuel types would mean “shippers would be more inclined to install scrubbers to save on fuel costs,” the US Energy Information Administration said in an outlook report published last year.
US marine fuel 0.5%S crack spreads to Brent weakened throughout January as demand slowed after a fervor of activity at the end of 2019.
USGC 0.5%S marine fuel was assessed at the end of January at $430.75/mt, down from an all-time high of $573.75/mt set January 3.
The USGC 0.5%S marine fuel/Brent crack topped out at plus $22.84/b January 2, using a barrels/mt conversion rate of 6.35. On January 31, the premium to Brent was just $9.64/b, S&P Global Platts data showed.
One US bunker trader said December was a busy month, as several shipowners loaded up on 0.5%S marine fuel ahead of the IMO 2020 sulfur regulations. The trader said most of the shipowners had enough supply to cover much of January, which meant suppliers had to lower their offers to attract additional business.
The trader said he believed retail demand would pick up in February as shipowners need to refill their tanks.
Sources in the US did say that blending and marketing 0.5%S marine fuel in the US had faced some additional difficulties, compared with Europe and Asia.
US sources said the current 0.5%S marine fuel trading has been lower in viscosity and density than in other regions because of the complex nature of US refineries that are optimized to maximize distillates output. The large presence of light sweet crude in the US refinery input also results in less residual production. Much of the viable lower sulfur blendstocks for 0.5%S are low in viscosity and density, US suppliers said.
The suppliers could not be certain that this was directly hurting sales of US marine fuel, but did say it presented additional challenges.