COVID-19 Rebound Key to Bunker and Shipping Markets

Mid-December seemed to be giving a peek into the 2021 bunker market, as fuel prices have been rising and Brent crude values have rebounded to pre-COVID-19 levels, and distillates, although lagging, have also gained ground.

In 2020, the launch of the International Maritime Organization’s mandate on limiting sulfur content of bunker fuel to 0.5%, colloquially known as IMO 2020, was going to be the game changer and the shipping industry was going to be thrown into a fuel supply panic. Then came the COVID-19 pandemic.

Shipping activity fell dramatically, and with it so did bunker fuel demand. The new IMO 2020-compliant fuel, very-low-sulfur fuel oil (VLSFO), which was thought to be short throughout the market, was abundant.

The market anticipated the spread between the traditional bunker fuel, high-sulfur 380 CST, and VLSFO (also known as the Hi-5 spread) to be between $200-$250 per metric ton. However, the spread never happened and averaged just $74.85/mt for the year in the U.S. bunkering hub of Houston, according to OPIS data. This data is a bit skewed by January and February, when the spread averaged $223.10/mt and $119.03/mt, respectively.

Payback time for shippers that installed scrubbers was recalculated due to the small spread to be years beyond what was originally forecast.

The tighter-than-expected Hi-5 spread was also a result of lower refinery runs, which produced less high-sulfur residual fuel, and therefore the expected excess of high-sulfur fuel oil also never materialized.

Looking into 2021, market dynamics should improve.

As of presstime, two COVID-19 vaccines are already being distributed, and there is a general look forward to somewhat more “normal” bunker and shipping markets.

Distillates make up the majority of VLSFO, and those prices cratered in 2020 on the back of lack of demand of jet fuel from the airlines and diesel from the transport sectors of trucking and rail. Distillates could also see significant upward demand movement as the COVID-19-related rebound continues, and with it increased prices and thus higher VLSFO values.

Already in mid-December 2020, VLSFO bunkers rebounded to price levels not seen since mid-March.

“I fully expect the VLSFO price increase to continue in 2021,” said one U.S. East Coast bunker broker. “If you look at prices rebounding — diesel, jet, HSFO [high-sulfur fuel oil] — it will cost more to make VLSFO and therefore higher prices. Also, demand has to increase as the global economy recovers.”

The broker added that HS 380 CST dropped in the market from about 80% to 15% on the new IMO regulations.

HSFO continues to be the wild card in 2021. Lower refinery run rates and refinery closures will continue to support HSFO prices, which are in recovery mode.

“HSFO availability continues to be controlled by refinery runs and lower production,” a bulk fuel oil trader in the Gulf Coast said. “Plus, you have the pull from coking … coking economics, the good stuff, needle coke, are good, so I don’t anticipate oversupply of HSFO.”

Thus, those factors may make the $200-$250/mt Hi-5 spread unattainable in 2021.

The bulk VLSFO spread to front-month Brent averaged $4.69/bbl during the fourth quarter of 2020 in Houston, and that level could hold in that area. As Brent has rebounded, that spread has tracked in line, plus or minus 50-75cts/bbl throughout the final months of the year. One caveat is, if there is a sharp increase in shipping activity, the market could be found short, but only for a brief period as blending components are readily available.

VLSFO blending should be more prominent early next year on supply economics.

“We have not been trading in the bulk market as we find better economics with blending the components ourselves,” a refiner/bunker supplier in the U.S. Gulf Coast said.

That could change if air travel and diesel-powered transportation experience sharp upward increases.

Shipping Needs Demand Rebound

The shipping market saw many firsts in 2020, and they likely may not repeat.

The year started on the heels of strong rates in late 2019 brought on by U.S. sanctions against several China shipping companies. In early 2020, the COVID-19 pandemic started to weigh on petroleum product demand at the same time oil prices were hitting record lows.

By mid-March, the world was scrambling to find vessels to stockpile product as the oil spigots were open in the Middle East and Russia and prices were cheap, which led to record freight rates across the globe. The lofty levels, however, were short-lived as shipping rates have languished through the latter portions of the year.

Looking ahead, market observers tie the shipping market outlook in 2021 to global oil product demand.

Market participants continue to point to the lack of demand and plenty of tonnage as spot shipping markets have been quiet and freight rates depressed.

Market watchers have said that the first half of 2021 could see freight rates remain depressed until demand recovers and supply in the tanker market thins out. Scrapping could also make an impact for this area if shipping companies decide to get rid of the older vessels.

“More scrapping should be observed in coming months, with some owners having already started negotiations in late 2020,” said Fotios Katsoulas, liquid bulk analyst with IHS Markit’s maritime and trade team. “The interest of the owners looking to place orders for new buildings is now clearly on LNG-fueled vessels, with a recent estimate suggesting that a[n] VLCC would operate at costs reduced by USD 8,000 per day compared to other modern units.”

One unknown area for the shipping world is possible development of emissions regulations by the International Maritime Organization or the European Union.

The shipping world dodged a bullet in 2020 as COVID-19 caused bunker prices to collapse and any potential cost increases from the new IMO 2020 lower-sulfur marine fuel regulations evaporated. But any new developments in this area would likely be unavoidable and new costs would have to be factored in.

Authored by Tom Sosnowski (thomas.sosnowski@ihsmarkit.com) and Eric Wieser (eric.weiser@ihsmarkit.com)

Tags: Bunker fuel, IMO 2020, Shipping, Spot Market