VLSFO deliveries surge from Q3 2019: Popularity of VLSFO supports rising premiums

Deliveries of 0.5% sulfur fuel oil and prices for the new product rose at major bunkering hubs at the end of 2019, according to the latest report from the International Energy Agency published Thursday.

“We are starting to see the first data on the [IMO 2020] transition and, it appears that deliveries of the VLSFO bunkers are increasing fast,” the IEA said. “In Rotterdam, [the Netherlands], they rose from almost nothing in September to more than 20,000 b/d in November and deliveries represented 51.6% of the total bunker market in November.”

January 1, 2020, saw the start of a new sulfur cap in bunker fuel burnt on the high seas, as mandated by the UN’s International Maritime Organization, which saw the cap fall from 3.5% to 0.5%. Ships equipped with exhaust gas cleaning systems, or scrubbers, can continue to burn 3.5% sulfur fuel.

At Singapore, deliveries of 0.5% S FO rose from 40,000 b/d in September to 355,000 b/d in November while in the same period 3.5% S FO for bunkers fell from 720,000 b/d to 410,000 b/d, the IEA reported. Further up the barrel, marine gasoil deliveries rose from 85,000 b/d in September to 105,000 b/d in November. 0.5% S FO now accounts for 46% of bunker fuel oil sales in Singapore, the agency said.

“For the moment, vessels and bunker suppliers appear to largely prefer VLSFO to MGO. Concerns regarding the quality of the new VLSFO and its compatibility with some engines are less prominent,” the IEA said, adding that price data supports this position and shows the spread between 0.5% S FO and MGO values shrinking.
The bunker fuel of choice

This popularity for 0.5% S FO has supported prices for delivered bunker assessments over their equivalent cargo and barge assessments, S&P Global Platts data showed.

In Northwest Europe, the pricing spread between 0.5% FOB Rotterdam barges and 0.5% bunkers delivered Rotterdam widened from $5.75/mt on August 16 to $52.75/mt in November 1. Since then it has narrowed. Platts assessed it at $13.25/mt Wednesday.

Meanwhile, premiums for bunker fuel against its upstream counterpart, cargoes, in Singapore have continued rising on the back of tight availability of the product and delays to barging schedules. Platts assessed 0.5% FOB Singapore cargoes at $579.66 Wednesday, while 0.5% bunkers delivered Singapore was assessed $85.34/mt or 14.7% higher at $665/mt.

“Initially, tight VLSFO availability and logistical issues may have forced some ships to use MGO. However there is now an estimated 7 million-8 million mt of VLSFO or components in floating storage around Singapore to help ensure supply,” the IEA said.
HSFO doldrums

This popularity for 0.5% S fuel oil has also widened its premium over 3.5% S FO, which now has a greatly diminished market.

The pricing spread between 3.5% and 0.5% at Rotterdam was $233/mt Wednesday, Platts data showed, with 3.5% bunkers assessed at $293/mt. In comparison, 3.5% bunkers delivered Rotterdam was assessed at $344/mt a year previously on January 15 in 2019, Platts data showed, when it was the bunker fuel of choice.

This poses difficult questions for the Russian refining sector. Russian refinery throughput was roughly flat in December, at 5.9 million b/d, the IEA reported. “The outlook remains clouded given their very high yields of high-sulfur fuel oil. Currently at about 12%, yields have declined from 20-25% seen a few years ago, but large-scale investments need to continue to further reduce fuel oil output,” the IEA said.
Source: Platts