HSFO/VLSFO Spread Analysis
March 24, 2023
Due to recent geopolitical and market developments, we consider the possibility for convergence in bunker prices within the VLSFO and HSFO market in the near-term. Al-Zour, a 615,000 b/d refinery that began exporting products last November, is poised to become a large supplier of VLSFO. The VLSFO barrels are likely to be exported from Al-Zour in the coming months and could limit the upside to crack spreads. Furthermore, the availability of cheaper Russian HSFO has provided strong incentive to defer a shift to VLSFO. These factors in tandem could create downward pricing pressure for VLSFO.
When considering HSFO pricing, there is potential for support and upward pricing pressure due to Russia beginning their spring refinery maintenance season as we enter late March. Approximately 900k b/d of refining capacity will come offline in May, capping Russian refinery runs at around 5.2 million b/d. Therefore, exports of Russian HSFO to East of Suez could fall. When we consider HSFO demand for power generation from the Middle East and South Asia, there is potential for HSFO cracks to remain supported.
In the event there is a pricing spread convergence between VLSFO and HSFO, the results could be two-fold: we could see export volumes from Middle East to Far East increase while higher VLSFO supplies could weigh on Asia’s fuel oil prices and refiners’ margins. In the event HSFO were to enter a contango structure in market East of Suez, and as China begins to increase trade activity, we could see excess pressure build for marine fuel prices in Singapore, the world’s top bunkering hub. Taking a VLCC voyage from AG to China, Figure 1 demonstrates how the scrubber price premium, here measured as a daily differential in VLCC TCEs, diminishes as the price between VLSFO and HSFO converges. In light of the above dynamic, we may observe a tightening dynamic, perhaps closer to US $100/ton in the following months. With earnings holding steady around US $100,000/day, the opportunity cost (basis 40 days in the yard) would increase the “total cost” by US $4 million, excluding the cost of the scrubber and the yard. As such, we would not expect a significant increase in scrubber retrofits due to the lengthening payback period.
Figure 1: Impact of VLSFO/HSFO Bunker Price Differential on Daily VLCC TCE
Source: McQuilling Services
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