When the shipping industry counts down to the New year on December 31, markets are unlikely to be in a celebratory mood as global markets will wake up to a whole new shipping regime come January 1: IMO 2020.
The new global regulation, introduced by the International Maritime Organization, will see the bunker fuel sulfur limit reduced to 0.5% from January 1, from 3.5%.
With just days to go, opinions in the global markets on the specification of the new marine fuel, as well as the most competitive pricing method, remain as divergent as they were a year ago.
Singapore is the world’s largest bunkering hub with total sales of 49.8 million mt in 2018. The new sulfur mandate will have a huge impact on the industry as 380 CST fuel oil with a sulfur limit of 3.5% accounted for 71.7% of total sales last year. Currently, high-sulfur bunker fuel is a product that suppliers blend to meet viscosity requirements.
However, the key parameter for the new fuel come 2020 is sulfur. In order to comply with the new sulfur limit of 0.5%, the viscosity and other parameters will become drastically different due to blending.
Most refiners are targeting or producing fuel oil-based 0.5% marine fuels, but the marine fuel could be a distillate-based product from refineries or blended fuel from other suppliers.
Typically, the 0.5% sulfur marine fuel produced by refineries are higher in viscosity but there are indications that the quality of some of the marine fuel could be closer to gasoil. Shipowners generally prefer marine fuel with higher viscosity than a pure gasoil-based blend for long voyages.
Russian oil major Gazprom Neft announced recently that it plans to supply 0.5% sulfur marine fuel from its Omsk refinery in 2020 and the company will begin to produce 0.5% fuel, largely based on hydro-cleaned gasoil, over the course of 2020.
Light touch, or tough enforcement?
The shipping industry is waiting to see how strictly port authorities will interpret the IMO 2020 rules.The limit is defined legally as 0.50%, meaning that a ship found to be burning a 0.51% sulfur fuel could be declared non-compliant - but the bunker industry typically takes a more lax interpretation in its commercial dealings.
Port states taking a strict interpretation of the rules could punish ships even for a small infraction. While fines on shipowners would be unwelcome, an even more problematic enforcement measure would be debunkering – forcing the offending ship to return to port, pay to remove its non-compliant bunkers and take on new fuel, imposing costly delays as well as additional expenses.
According to market participants, in enforcing the 0.1% sulfur limit in Northwest Europe, some authorities have required debunkering in cases where the ship was found to be burning fuel with just a 0.11% sulfur content.
Price references
Opinions on pricing of the new marine fuel appears to diverge as well as some market participants have chosen to price marine fuel against gasoil while others are pricing off Marine fuel 0.5%.In early October when the spot demand for marine fuel 0.5% started to pick up, cargoes priced off MOPS 10ppm gasoil were found to cost more on a dollar per ton price compared with cargoes pricing off Marine Fuel 0.5% basis.
However, this trend has reversed in recent days as a spike in spot demand for marine fuel 0.5% has pushed cargoes pricing against marine fuel 0.5% to surpass cargoes priced off gasoil.
The choice to price marine fuel 0.5% using gasoil as a basis seems to be a more competitive option at the moment, however it all boils down to how the different product prices will trend in the days after January 1.
Between October 1 and December 10, the FOB Singapore spot price for 10ppm gasoil declined 1.5%, while the spot price for marine fuel 0.5% climbed 19.8% over the same period, supported by the pick-up in end-user demand.
Over the same period, the price spread of marine fuel 0.5% over 380 CST HSFO, or what the industry terms as the 'high five spread', in Singapore surged nearly two and a half times higher from $119.40/mt on October 1 to $288.96/mt on December 10.
Trades and open interest surge
In the month of November, the total volume of trades observed during S&P Global Platts' market on close process for FOB Singapore marine fuel 0.5% cargoes reached 300,000 mt, compared with 200,000 mt of cargoes changing hands in the previous month.Open interest for marine fuel derivatives has also been climbing steadily through the year. As the end of October, total volume of open interest globally on marine fuel 0.5% derivatives stood at 59.36 million barrels, with OI for FOB Singapore marine fuel 0.5% paper at 27.86 million barrels.
Based on the industry estimates, supply of the new marine fuel should be adequate in Singapore in the immediate term. However, market participants are uncertain about the supply and the quality of the new fuel once the inventory has been draw down.
The shipping industry will have to contend with differing specifications across a variety of marine fuel blends, and deciding on the pricing method to yield the most competitive price for the fuel. That task is likely to make for a turbulent start to 2020.