Big swings in marine fuel prices and freight rates due to IMO 2020 and coronavirus have led to increased appetite for hedging, with financial instruments settled against S&P Global Platts physical 0.5% sulfur assessments at record highs, Intercontinental Exchange said Feb. 25.
Not registered?
Receive daily email alerts, subscriber notes & personalize your experience.
Register NowSince February 2019, open interest across marine fuel has grown to a record 274 million barrels equivalent on Feb. 23, with traded volumes up 114% year on year, ICE said.
A change in International Maritime Organization regulations meant sulfur emissions from ships on the high seas were capped at 0.5% from Jan. 1, 2020, down from 3.5% previously.
As a result, ship operators have had to burn either pricier compliant fuel such as 0.5%S fuel oil or low sulfur gasoil or they have had to install an exhaust gas cleaning system -- scrubber -- to continue to burn 3.5%S fuel oil.
"Just over a year on from IMO 2020 implementation, we are seeing record growth across our Marine Fuel and Wet Freight contracts as refiners, shippers and trading companies from every continent across the world turn to these products to hedge exposure to global oil and maritime markets," Jeff Barbuto, Global Head of Oil Markets at ICE, said in its statement.
Since February 2019, ICE has launched a series of cash settled marine fuel products which settle against Platts physical 0.5%S marine fuel assessments, including a further 15 contracts which launched last December. Today, the complex is composed of about 50 different marine fuel contracts, the exchange said.
ICE customers are trading ICE marine fuel contracts as outright futures, time spreads, differentials to high sulfur fuel oil, Brent, or low sulfur gasoil, ICE said.
The interest in paper instruments has been reflected in other platforms. The first indications for 0.5%S/3.5%S FOB Rotterdam marine fuel oil barges were reported in the Platts Market on Close assessment process in London on Feb. 17.
The offered swaps come almost 17 months after the first physical marine fuel 0.5%S FOB Rotterdam barge indications, which were first placed during the Platts MOC process on September 26, 2019.
Besides marine fuel contracts, ICE is seeing record activity in the wet freight complex, which hit a series of open interest records through February as the market increasingly hedged exposure to freight markets.
"In February, Cal25 trades in Wet Freight took place for the first time reflecting how as liquidity grows, customers are comfortable taking positions as far out as 2025," ICE said.
Managing turbulence
There have been signals that companies are taking increased precautions against rising fuel bills in similar directions.
Insurance company Aon has launched a product to cover spikes in the cost of bunker fuel and jet fuel, as energy markets brace for continued volatility.
"We do not see our insurance product as being a direct competitor to traditional fuel hedging; we have clients that have suggested they will utilize both in their overall fuel strategy," Chris Bhatt, global head of sales, marine, at Aon, told Platts.
Aon envisages that the costs of the product will be lower than those of traditional hedging.
The ICE data may show greater volumes of IMO 2020-compliant fuels being hedged but not all market players have been reporting higher appetite for this particular form of risk management.
At least some players are not hedging their positions any more than they were previously, Soren Holl, CEO of bunker trader and broker KPI OceanConnect, told Platts in an interview in January.
"Most of what we are doing on hedging is primarily based on clients who follow their [own] hedging strategy, so some will have a hedging strategy and will always hedge X amount of [their] exposure," Holl said.
In freight markets, dirty tanker FFA volumes traded across 2020 totaled 367,796 lots, according to data from Freight Investor Services, a dry bulk freight and commodity futures interdealer broker.
VLCC futures represented 85% of the liquidity reported across the year. Clean tanker volumes over 2020 amounted to 240,504 lots.
"The first half of 2020 saw an outburst of activity," an FFA trader said. "Volume has come down as the physical market turned bearish, but this year has been very liquid overall."
Hedging interest has quietened thus far in 2021, with FFA for tankers seeing a big sell-off in January amid surprise supply cuts of Saudi crude and slow vaccine roll-out, traders said.
However, market participants expected interest to pick up in the coming months, with new trade flow patterns opening possibilities for increasing offering in the FFA market.
"The disruptions we saw in 2020 will have a long-lasting effect on the physical market, and the FFA market will have to evolve to accommodate the new trade flows" a second broker said.
"Traders are now concerned with splitting liquidity in this bearish market, but we should see more diversification in routes and ship sizes traded as the market recovers."