Q4 Fuel Transitions Ahead Of IMO 2020 Regulations

Commercial maritime vessels are shifting from consuming high-sulfur fuels to their low-sulfur future in the fourth quarter of 2019 leading up to the IMO 2020 sulfur regulations.

The portion of the refined barrel that constitutes low-sulfur and middle distillates is experiencing substantial demand growth. This can mean higher prices for other low-sulfur fuel consumers in addition to the commercial maritime industry, particularly the trucking and rail industries.

Refinery operations are transitioning to accommodate changing refined product needs for IMO 2020. Fuel sales have already dramatically changed, and the timeline for greater market demand for low-sulfur fuels– and therefore upside price risk – will extend into the first quarters of 2020.

Low-Sulfur Bunker Sales are Growing

The market share of bunker fuel sales has shifted internationally. During the month of November, very-low-sulfur fuel oil (VLSFO) sales at the Port of Singapore nearly equaled the high-sulfur fuel oil (HSFO) sales. In aggregate, low-sulfur fuels overtook high-sulfur products in the market, reaching about 52 percent of market share.

Singapore bunker sales took a significant step toward their low-sulfur future during the month of November. The combined sales of low-sulfur marine gas oil and very-low-sulfur fuel oil achieved over 50 percent market share. Other key international bunkering hubs have reported VLSFO demand reaching as much as 65 percent of their sales during the month.

The amount of market share captured by VLSFO during the month of November at major bunkering hubs is a promising sign for any lingering doubts concerning its availability

The HSFO Price Decline Has Been Dramatic

HSFO prices have become heavily discounted to crude oil, reflecting its decreasing demand. Prices of IFO 380, the most common high-sulfur fuel presently consumed internationally, have plummeted. Prices fell to just $275/mt to end the month of November after being as high as $475/mt in the week following the attacks on Saudi Arabian crude infrastructure in September. The attacks immediately tightened supply for HSFO but the market has become over-supplied since.

The spread between HSFO and VLSFO has widened considerably during the fourth quarter, but as suggested in the previous paragraph, much of this change has been driven by deepening discounts for HSFO. The average price of VLSFO across major bunkering hubs was nearly double the price of HSFO to end the month of November at about $550/mt.

IFO 380 (HSFO) prices have fallen nearly $200/mt since the end of September as demand has shifted toward low-sulfur fuel. While the widening market spread of VLSFO to HSFO has been discussed thoroughly, this chart helps to demonstrate that the spread is most attributed to a growing discount for HSFO, and not spiking prices for VLSFO. Low-sulfur fuels have maintained a tighter, positive correlation with crude oil prices (benchmarked in the chart above).Source: Bloomberg Intelligence, Port prices reflect the average fuel price in the ports of Singapore, Rotterdam, Fujairah, and Houston.

Simply comparing the current spread between HSFO and VLSFO is not a fair representation of price pressure, although this comparison has repeatedly been treated as such in coverage of IMO 2020. Instead, the year-over-year difference between current VLSFO prices and 2018’s HSFO prices should be analyzed. HSFO prices averaged $430/mt during November of 2018, while VLSFO prices finished this November with prices near $540/mt. This comparison demonstrates the cost of conventional marine fuel has increased about 25 percent year-over-year (reference chart above). 

Ultimately HSFO prices will eventually find a new equilibrium once its use for blending or consumption outside of commercial shipping stabilizes the market. The blending of HSFO to create IMO compliant fuel has increased but prices have not yet fallen to their floor. The new equilibrium will also occur as scrubbers continued to be installed on vessels supporting additional HSFO demand. There will be about 3,000 scrubbers installed when enforcement of the sulfur cap begins on January 1, 2020.

Expect Price Impacts With an Accelerating Transition

As expected, carriers have not been in a rush to pay higher prices for lower-sulfur fuels. As such, the second half of Q4 2019 has been far more active than the first half when it comes to shifting supply-demand fundamentals. This also likely means low-sulfur fuel prices will continue to experience upward pressure from the shift in demand.

Breakthrough has indicated upside price risk for low-sulfur fuels during the final quarter of 2019 and into the first quarters of 2020. This is due to the quick shift in demand toward low-sulfur fuels, and the fact that low-sulfur fuel stocks presently remain tight. For example, the U.S. inventory levels of low-sulfur distillates, including ultra-low-sulfur diesel, remain about 10 percent below the five-year average for this time of year.

This price pressure includes low-sulfur fuels that will be directly consumed by the maritime industry, as well as low-sulfur fuels for inland transport.