With less than 11 months left until the IMO 2020 regulation on low-sulphur bunker fuel comes into effect, the availability and price of the low sulphur fuel oil (LSFO) as well as high sulphur fuel oil (HSFO) are still very uncertain. The uncertainty is making investment decisions pertaining to the upcoming regulations difficult for all industry participants, ranging from shipowners, charterers, refiners and bunker suppliers.
From a shipowner’s perspective, it is difficult to gauge the economic viability of investing in scrubbers. At the same time, for owners who have already fitted scrubbers or decided to fit scrubbers on their vessels, it is difficult to decide on the period rates they should seek when chartering out their vessels, given the absence of any clarity in the likely price premium between LSFO and HSFO 0.5% sulphur marine fuel.
For bunker suppliers, the decision on credit lines for their clients ahead of the upcoming high price bunker environment will be difficult in the absence of any price discovery mechanism for the new bunker fuel. Moreover, if the bunker suppliers don’t increase credit limits in line with the expected increase in prices, bunker buyers will have to be prepared for a likely decline in their purchase limit with bunker suppliers
Amid these uncertainties, some shipowners are using 0.1% marine gas oil futures traded at the Intercontinental Exchange (ICE) as a hedging tool to cope with future bunker price risks in the absence of a futures trade in 0.5% sulphur marine fuel. However, the start of derivative trade on 0.5% sulphur marine fuel oil on the New York Mercantile Exchange (NYMEX) on 31 January 2019 gave some relief to industry participants, as it will help support price discovery for the new lower-sulphur fuel grade.
The exchange started 11 futures contracts for LSFO covering three key trading centres—Singapore, Rotterdam and the US Gulf Coast. Apart from the outright contracts for 0.5% marine fuel oil, there are contracts for price spreads with 3.5% marine fuel and price spreads between major locations. In addition, there are options for three different lot sizes for Rotterdam and Singapore locations. All contracts will be settled against physical marine fuel price assessments from S&P Global Platts.
Although the first trade on December 2019 Singapore 0.5% Fuel Oil versus December 2019 Singapore 380 spread was done at $200, there will be high volatility in prices for some time because of low liquidity. However, price discovery will become efficient once liquidity improves in the coming months.
The futures trade in low-sulphur bunker fuel will not only help support price discovery, it will also give a much-needed tool to the industry participants to hedge bunker price risks, and will thereby aid investment decisions by industry participants ahead of the implementation of the new environmental regulations.