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HSFO on the Rise

Nov. 13, 2020

As promised on last week’s highlight, we are interested in exploring the potential scenario of high sulfur fuel oil (HSFO) pricing very close or even at par with very low sulfur fuel oil (VLSFO) in the near-term.  As we had predicted, VLSFO and not MGO became the fuel of choice after the IMO 2020 regulations took effect on January 1st.  Despite, or better, because of that, scrubber installation became a “hot” topic during the time leading up to the transition as shipowners wanted to take advantage of the, at the time, expected high price spread between the two fuels.  Worldwide developments though have all but upended those plans.

Even before the coronavirus spread became officially a pandemic, we had seen the price differentials between the two fuels fall from the highs observed in the beginning of year.  As global lockdowns destroyed transportation fuel demand and many tankers were utilized for floating storage of crude and products, we saw the price of VLSFO retreat significantly.  As an example, the average spread for March was at US $105.7/MT, whereas in April it had already dropped at US $65.1/MT for Singapore – the world’s largest bunkering hub (Figure 1). Currently, we calculate an average difference of US $54.35 for November.

The reason that may lead to such a scenario is closely related to the surge in drydocking we have observed in October.  As many as 40 VLCCs were observed entering drydock for reasons we examined in our previous weekly highlight.  We estimate approximately 20% of them had a scrubber installation scheduled, continuing to add demand for HSFO, along with newbuilding deliveries, which almost exclusively are equipped with scrubbers across the various shipping segments.   More scrubbers mean higher demand for HSFO -so that owners can take advantage of the presumed price difference- and higher demand for the fuel in a low supply environment could lead to a gradual hike in prices, inching closer to VLSFO by the day.

While the above is nothing new in terms of a market dynamic, the consequence of low crude pricing has reduced the amount of sweet crude production, namely US shale oil.  With the lightening of the crude slate, refiners’ ability to produce straight-run fuel oil has been mitigated.  Instead, we note that the percentage of blended VLSFO is moving higher, effectively increasing demand for HSFO, at a time when more scrubber-installed ships are entering the fleet.  This combination of factors may lead to an increasingly narrower spread between the two fuels, a development very few would have predicted this time last year.

Figure 1 – HSFO & VLSFO Price Development and Price Spread - Singapore Port

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Source: McQuilling Services