Global fuel oil markets weathered choppy waters in 2020, contending with the monumental change brought by the International Maritime Organization’s global sulfur cap, but also demand destruction on the back of the coronavirus pandemic.
Demand for 0.5% sulfur marine fuel skyrocketed at the start of the year, as IMO 2020 regulations kicked in and made it the bunker fuel of choice. This led to record wide spreads between 0.5%S marine fuel and 3.5% high sulfur fuel oil (HSFO) globally.
Unfortunately for those who invested in scrubbers—exhaust gas cleaning systems that allow ship operators to continue using higher sulfur fuels—the price rise was short-lived. Marine fuel markets came under pressure in February 2020 amid the intensifying COVID-19 crisis, which weakened arbitrage opportunities and left global oil markets to grapple with product oversupply.
While volatility from IMO 2020 was expected in the early stages of the year, no one quite anticipated the degree of volatility bunker players would face from the collapse of oil demand globally.
S&P Global Platts assessed the spread between 0.5%S and 3.5%S fuel oil at its widest on January 3, 2020, at $321.50/mt, on an FOB Rotterdam barges basis. Following the widespread impact of COVID-19 on oil markets, the spread plunged 88% to $38/mt on June 4, 2020.
In addition to the overall decline in 0.5%S marine fuel prices, COVID-19 also disrupted the downstream pricing dynamic in the US Gulf Coast. Since April, the Houston marine fuel 0.5%S bunkers market has averaged a negative margin to the USGC wholesale barge market.
Houston 0.5%S bunkers fell to a discount as large as $35/mt to the cargo market at one point in 2020, after starting the year nearly $100/mt higher than cargo. For comparison, the Houston IFO 380 bunkers price averaged a $37/mt premium to the wholesale USGC HSFO market for 2019, a typical spread for the retail end of the supply chain.
Transport fuel demand collapsed as a result of restricted travel and social distancing, but was felt more acutely in air and land transport fuels, with most global trade taking place on the high seas. Demand for jet fuel, gasoline and diesel came under significant pressure amid national lockdowns, pushing refineries to reduce their runs.
By the end of September 2020, the 0.5%S marine fuel Brent crack surpassed that of all other transportation fuels in Europe, as it priced stronger than traditionally more profitable products such as diesel, gasoil and jet. This strength continued into 2021, supported largely by an eastward pull towards Singapore and the surrounding region while domestic availability remained constrained on months of refinery run cuts.
The 0.5%S marine fuel Brent crack averaged $7.88/b in January 2021. To put this into perspective, the 2020 low on April 27 was assessed at 31 cents/b, while the 2020 high on January 6, 2020 was at $23.54/b.
Asian demand for 0.5%S marine fuel stemmed from the regional utility market and from sellers looking to restock after running down inventories in December in the lead-up to year end. Tighter LNG stocks prompted Northeast Asian electricity providers to secure, by whatever means necessary, other sources of power generation and industrial feedstocks, to keep up with robust winter energy demand.
As such, the Asian marine fuel 0.5%S crack spread, the difference between front-month Singapore marine fuel 0.5%S and the Dubai crude swap, widened to a 10-month high of $13.07/b on January 20, 2021.
Similarly, the USGC 0.5%S marine fuel crack trended upwards 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 products crack in the region.
The USGC marine fuel 0.5%S forward curve shows the crack stabilizing around an $8-$9/b premium to Brent this year though, so the USGC ULSD and gasoline cracks are expected to overtake it later in the first quarter and remain at a premium throughout the summer, in line with seasonal increases in demand for those products.
Looking at the bottom of the barrel, 3.5%S fuel oil prices, which were expected to fall off a cliff after IMO 2020, showed resilience and enjoyed steady margins in 2020, with prices expected to be stable or firmer in 2021.
Rotterdam bunker sales saw HSFO take 28% of total demand in the year, and 34% in Q4. The European HSFO Brent crack averaged negative $8.74/b in 2020, compared with negative $13.62/b in 2019. This relative strength was supported by reduced refinery runs, power generation demand from Saudi Arabia, and increased demand from vessels retrofitted with scrubbers.
The USGC HSFO cracks strengthened throughout 2020 and were largely stable at about a $10/b discount to 0.5%S marine fuel due to HSFO’s outlet as a coking feedstock. US refinery utilization recovered to start 2021 at 82.5% operable capacity, the highest since March.
At the heart of the bullish sentiment around HSFO for 2021 are expectations of progressively rising demand led by an increase in the adoption rate of scrubbers. New scrubber installations are expected to rise from 18% of the global fleet in 2020 to 28% in 2025, and in December 2021, vessels with scrubbers are likely to account for over 1 million b/d of 3.5%S FO demand, according to Platts Analytics.
But there may also be a shift in terms of the major locations for HSFO supply. The cost of maintaining storage and delivery infrastructure to meet a small volume of HSFO demand is likely to become unfeasible at all but the biggest bunkering hubs globally, with relatively smaller bunkering hubs refocusing on low sulfur marine fuel. That bodes well for Singapore, the world’s largest ship refueling destination, with state-of-the-art infrastructure and vast storage capacities, putting it in a good position to take a bigger share of HSFO trade.
After tackling sulfur emissions, the next major IMO goals include reducing carbon intensity—the CO2 emissions of the international fleet averaged out per vessel. The organization is targeting a 40% cut by 2030 compared with 2008 levels, and a reduction in total greenhouse gas emissions of 50% 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 upfront costs can be considerable. The transition to lower-sulfur bunker fuels in 2020 has demonstrated some of the unique challenges presented by global shifts in specifications, even within the same residual oil-based product. Therefore, the emerging lower-carbon bunkers are likely to supplement, rather than quickly replace, the use of residual-based fuel.