Global fuel oil markets weathered troubled waters by 2020 in defiance of the monumental change brought about by the International Maritime Organization’s global sulfur cap, but also calls for destruction on the back of the coronavirus pandemic.
Demand for 0.5% sulfur fuel rose sharply at the beginning of the year when the IMO 2020 rules started making it the bunker fuel of choice. This led to record-breaking ranges between 0.5% S marine fuel and 3.5% high sulfur fuel oil (HSFO) globally.
Unfortunately, the price increase was short-lived for those who invested in scrubber – exhaust gas cleaning systems that allow the ship’s operators to continue using higher sulfur fuels. The marine fuel markets came under pressure in February 2020 in the midst of the intensified COVID-19 crisis, which weakened arbitrage opportunities and left global oil markets struggling with product surpluses.
While volatility was expected from IMO 2020 in the early stages of the year, no one quite expected the degree of volatility that bunker players would face in the face of the collapse of oil demand globally.
S&P Global Platts estimated the range between 0.5% S and 3.5% S fuel oil at its widest on January 3, 2020 at $ 321.50 / mt on FOB Rotterdam barges. Following the widespread impact of COVID-19 on the oil markets, the spread fell 88% to $ 38 / mt on June 4, 2020.
In addition to the overall drop in marine fuel prices of 0.5% S, COVID-19 also disrupted the subsequent price dynamics in the US Gulf Coast. Since April, the Houston marine fuel 0.5% S bunker market has averaged a negative margin to the USGC wholesale product market.
Houston piles of 0.5% fell to a discount of as much as $ 35 / mt in the freight market at some point in 2020 after starting the year nearly $ 100 / mt higher than freight. By comparison, the Houston IFO 380 bunker price averaged a $ 37 / mt premium to the 2019G USFC HSFO wholesale market, a typical spread for the retail chain.
Transport fuel demand collapsed as a result of limited travel and social distance, but was felt more acutely in air and land transport fuels, with most global trade taking place on the high seas. Demand for aviation fuel, gasoline and diesel came under significant pressure amid national lockdowns, creating refineries to reduce their runs.
At the end of September 2020, the Brent crack at 0.5% S marine fuel exceeded that of all other transport fuels in Europe, as it priced stronger than traditionally more profitable products such as diesel, gas oil and jet. This strength continued into 2021, mainly supported by an eastward pull towards Singapore and the surrounding region, while domestic availability remained limited by months of refinery cuts.
The Brent crack at 0.5% S marine fuel averaged $ 7.88 / t in January 2021. To put this in perspective, the 2020 low on April 27 was estimated at 31 cents / b, while the highest in 2020 on January 6 2020 was at $ 23.54 / b.
Asian demand for 0.5% S marine fuel came from the regional supply market and from sellers wishing to restore stockpiles in December to the end of the year. Tighter LNG inventories led Northeast Asian electricity providers to secure, whatever needed, other energy sources and industrial raw materials to keep pace with robust winter energy needs.
As such, the Asian marine fuel 0.5% S-spreading spread, the difference between the first-month Singapore marine fuel 0.5% S and the Dubai raw swap expanded to a 10-month high of $ 13.07 / b on January 20, 2021.
Similarly, the USGC 0.5% S marine fuel crack trend upward in January 2021 amid limited local supplies, reaching levels not seen since before the pandemic. The product recently overtook USGC ultra low sulfur diesel (USLD) to record the highest refined product crack in the region.
USGC marine fuel 0.5% S forward curve shows crack stabilizing around an $ 8- $ 9 / b premium to Brent this year, however, so USGC ULSD and gasoline cracks are expected to overtake it later in the first quarter and remain at a premium throughout the summer in in line with the seasonal increase in demand for these products.
Sustained demand for HSFO
Looking at the bottom of the barrel, fuel oil prices of 3.5%, which were expected to fall down a cliff after IMO 2020, showed resilience and had stable margins in 2020 with prices expected to be stable or firmer in 2021.
In Rotterdam’s bunker sales, HSFO took 28% of total demand in the year and 34% in the 4th quarter. The European HSFO Brent crack averaged negative at $ 8.74 / bi in 2020 compared to negative $ 13.62 / bi in 2019. This relative strength was supported by reduced refinery runs, demand for power production from Saudi Arabia and increased demand from ships , which was retrofitted with scrubbers.
The USGC HSFO cracks were strengthened during 2020 and were largely stable at approx. $ 10 / b discount for 0.5% S marine fuel due to HSFO’s outlet as coke feed. U.S. refinery utilization recovered to start 2021 with 82.5% operating capacity, the highest since March.
At the heart of the bullish sentiment around HSFO in 2021 is the expectations of gradually increasing demand, driven by an increase in the adoption rate for flounder. New scrubber installations are expected to increase from 18% of the global fleet in 2020 to 28% in 2025, and in December 2021 ships with scrubbers are expected to account for over 1 million b / d on 3.5% S FO demand, according to Platts Analytics.
However, there may also be a shift in terms of key locations for HSFO delivery. The cost of maintaining storage and delivery infrastructure to meet a small amount of HSFO demand is likely to be impossible at all, except for the largest bunkering hubs globally, with relatively smaller bunkering hubs focusing on low-sulfur marine fuel. It bodes well for Singapore, the world’s largest ship refueling destination, with the latest infrastructure and huge storage capacity, putting it in a good position to take a larger share of the HSFO trade.
Following the tackling of sulfur emissions, the next major IMO targets include reducing carbon intensity – CO2 emissions from the international fleet are average per capita. Vessel. The organization aims for a 40% cut by 2030 compared to the 2008 level and a 50% reduction in total greenhouse gas emissions by 2050.
A number of so-called “future fuels” are being considered, including hydrogen, ammonia and biofuels, but the infrastructure for these products is limited and the cost in advance can be significant. The transition to lower sulfur bunker fuels by 2020 has shown some of the unique challenges posed by global shifts in specifications, even within the same remaining oil-based product. Therefore, the new piles of lower carbon are likely to supplement the use of residual fuel rather than quickly replace it.
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