Bunker Fuels Focus: IMO2020 Update #17

Transcription

1 USD/t Stormy Seas Bunker Fuels Focus: IMO22 Update #17 Highlights Bunker Pricing, Refinery Investment & Fuel Availability: A new year, a new IMO trade? Early signs are emerging that the tide may turn soon Shipping Market Moves, Enforcement & Power: VLSFO pricing raises concerns over scrubber economics is it overdone? 1. Bunker Pricing, Refinery Investment & Fuel Availability: A new year, a new IMO trade? Early signs are emerging that the tide may turn soon Last year we really saw a complete mirror trade through IMO. In paper markets, from September 217 to May 218, short HSFO/long gasoil positions saw most oil traders long IMO. Rising crude prices, alongside strong industrial demand, lifted up the gasoil price alongside crude. However, by July, nervousness around the trade was creeping in. A shifting crude feedslate (see Stormy Seas: IMO 22 Update #5) saw Brent/Dubai EFS narrow, while reduced fuel oil supplies from Venezuela, the Middle East and latterly Russia saw a very tight HSFO prompt market emerge. The final nail in the coffin was the collapse in the flat price in October (helping to see the gasoil price, pulled down with crude, reconnecting with HSFO). Many traders were stopped out of long IMO positions by September/October. Fig 1: Singapore 1ppm Sing Gasoil vs. Sing 38 cst Fuel Oil, $/t 45 4 Strengthening crude price and weak fuel oil Collapse in crude price sees gasoil come back to earth, while the fuel oil market tightened up 15 However, don t be fooled IMO is not going away just yet. Moreover it is our contention it might be time to start repositioning for long IMO positions once again. 1

2 USD/t FGE - Stormy Seas: IMO Bunker Repor December 21, 21 We are seeing some some players return to the Singapore physical market Through most of last year we saw a retreat from the Singapore fuel oil market, as long exposure to fuel oil became more and more expensive in a steeply-backwardated market: BP exited onshore fuel oil terminals in Singapore (at end Dec-17), Glencore (at Helios) and Repsol (at Tankstore) both left Singapore in April, and finally Vitol left its tank storage lease for fuel oil at Oiltanking Seraya in Singapore at end-june. Fig 2: Calendar Strip 219 vs. Calendar Strip 22 38cSt Fuel Oil, $/t Glencore & Repsol terminate lease Vitol terminates Seraya lease BP leaves Singapore A tightening spot 38cSt market with severe backwardation along the forward curve has been the root of the problem. It has been hard for fuel oil traders in Singapore to generate a profitable margin and stay in business when forward pricing has been so weak, particularly when storage lease costs were so high and forward pricing was so negative. Fees for onshore tanks were around $5-7/t in 217, finally dropping to as low as $3/t by mid-218 as traders emptied tanks. Add to this a tight distillate market, making the availability and pricing of cheap cutter stocks another painful cost that made another avenue of profit expensive: blending. The cycle starts again for fuel oil A lot of the problem starts and ends with the oil price, however. In the case of fuel oil, this is no different. The fall in crude prices recently has seen backwardation along the fuel oil forward curve lessen (with CAL2 prices staying relatively flat). On top of this, increased supply of VGO material (partly due to the supply of.5%s bunker fuel and partly due to poor FC RFCC/FCC economics as gasoline prices collapsed) is helping to provide availability of low viscosity blendstock, helping to create a blending margin. South Korean exporters have been sending LCO (an ideal cutter stock) to Singapore recently. On top of this, an increase in lower viscosity straight-run fuel oil has been flowing into Singapore. ADNOC was still offering 1cSt 2% straight run recently. The Ruwais RFCC restoration project achieved mechanical completion ahead of schedule albeit it will take some time to fully ramp up.

3 mmb US$/bbl FGE - Stormy Seas: IMO Bunker Repor December 21, 21 We can see this properly reflected in the Visco spread, which has come off since October (now at just $2/t): The cycle starts again for fuel oil - A blending margin emerges with lower backwardation along the forward curve, incentivizing the return to Singapore It seems as if Singapore fuel oil traders can once again breathe. A moderately profitable back-to-back trade and blending operation is emerging. This may provide some small incentive to remain in Singapore or indeed provide a good entry point for traders preparing ahead of IMO at the end of this year. Onshore storage rates in Singapore, with lease holding costs at $3/t, have come off significantly; while increased availability of lower viscosity materials such as VGO and LCO (as a result of poor VGO feed economics in FCCs and rising IMO compliant supply for test fuels) is improving blending margins. Finally, on top of this, a lower flat price has seen the backwardation weaken significantly. Fuel oil traders can now try and create a forward contango, potentially by blending heavier material with cheaper cutter stock, and selling forward 18cSt based on a 38cSt plus cheap cutter cost. Fundamentals still remain the same And there remains a lot more potentially in store for traders in 4Q this year. A very strong contango structure in 22 will help to drive a strong cash-and-carry trade through early 22. We continue to see surpluses start to emerge in the final quarter of the year, once ship-owners start switching over into LS fuels with scrubber uptake still relatively limited. This will inevitably put downwards pressure on 38cSt, incentivising storage. In Asia alone, we expect to see surpluses of fuel oil of over 1 kb/d vs. 218 levels. With flat prices now finding a floor, and with expectations of crude prices gradually strengthening from here, this is only going to help raise the gasoil price through Cal19 and Cal2. The question still remains, following a painful trade in October to December last year, whether the market has the stomach for round 2 of IMO? Timing the contango in the market will be key but at least the early signs of a more profitable 22 for fuel oil traders are here. Fig 3: Asia Fuel Oil Balance, mmb/d Fig 4: Sing 38cSt Swaps Crack (vs. Brent), $/t Quarterly Accumulative SG HSFO crack (RHS) 28/11/18 FGE Forecast

4 Years FGE - Stormy Seas: IMO Bunker Repor December 21, Shipping Market Moves, Enforcement & Power: VLSFO pricing raises concerns over scrubber economics is it overdone? There s been a fair amount of concern in the market regarding scrubber order cancellations on a narrowing gasoil/fuel oil spread. The economics of scrubbing have always been determined by the spread in cost of fuel inputs. The concern has become even more acute, following the release of VLSFO prices in the new year which appear relatively cheap: Taiwan s CPC Corporation has provided its first indication for.5%s LSFO 18cSt, priced at a $1/t premium over 18cSt 3.5% in Taichung, Kaohsiung and Keelung in Taiwan; Platts long-awaited release of the FOB Singapore Marine Fuel.5%S assessment was priced at $37/t, $4/mt higher than 38cSt HSFO. There s even been rumours regarding scrubber options not getting exercised; but nothing from our perspective has been announced or reported relating to ship-owners getting skittish and backing out of any orders (at the moment). South Korea s SK Shipping did cancel a number of orders on VLCCs and VLGCs back in October, but that was more of a decision taken to reduce their shipping exposure, reducing their stake in SK Shipping to Hahn Shipping. A premium of just $4/t is a worrying situation for ship-owners and charterers. This would render the shared economics of scrubbing difficult. Fig 5: Scrubber Payback Period for VLCC at Different Fuel Spreads $/t fuel spread N.B. Prices are based on assumption of an all-in capex of $4.5mn, 22 seafaring days, 5 t/day consumption, 1% financing and fuel btu/gal adjustment for VLSFO.5%S. Spot premiums of VLSFO don t really tell us much about scrubber economics In our view however, these premiums are not something to be overly concerned about from the shipowners perspective, for a variety of reasons:

5 FGE - Stormy Seas: IMO Bunker Repor December 21, 21 These are initial quotes based on vey little liquidity and we expect to see further price discovery until we get a full reflection of the true market price. The initial Platts.5%S marine fuel price quote, for instance, was based on just two 2kt offers on 2 nd January (one by Mitsui and the other by BP in Singapore); The small premiums on offer at the moment are more a function of the narrow gasoil/fuel oil spread, that we are seeing in the market (which should widen out naturaly as crude recovers from recent lows); Finally, and most importantly, these are spot premiums and are in no way indicative of forward pricing for the fuel in 4Q219 and 1Q22, when we expect diffs to blow out. Even considering these factors above, the illiquid VLSFO premiums have been more or less in line with what we expected (albeit we will need to wait till 4Q to see the diffs blow out properly as ship-owners shun high sulphur barrels). The market needs to consider that availability of VLSFO is likely to be much tighter in 4Q, when ship-owners are forced to start consuming larger quantities of the fuel. The premiums in Taiwan & China for LSFO 18cSt have been much higher; reflecting, in our expectations, the primarily distillate nature of the fuel which was always going to be slightly lighter. The fuel potentially reflects pricing of largely VGO-type distillate fuel, and is always going to see a higher premium over 18cSt HSFO. Pricing of VGO as bunker blendstock is always going to reflect the opportunity cost of not running the fuel through an FCC unit (producing FCC gasoline, light/heavy cycle oil and other FCC outputs), instead choosing to backfill the VGO into the marine pool. This fuel may become more readily available as we approach 22 (depending on gasoline and distillate pricing in 2/3Q 22). While the release of the 38cSt.5%S assessment in Singapore the new Platts.5%S specs was much lower than what was expected by many in the industry. The Platts FOB barge quote for 38cSt we think likely reflects a heavier.5%s straight-run material. The marginal cost of producing this fuel is a reflection of unit cost of operating an RDS unit (largely the input hydrogen and energy costs). While marginal cost of producing the fuel is lower, availability around the implementation date is questionable. We still suspect there will be not enough LSSR to keep everyone happy, which may impact pricing. Finally, as we mentioned in a previous Stormy Seas, we expect much of this tightness in fuel oil to continue through 1H218 and potentially into 3Q218 (see Stormy Seas: IMO 22 Update #15), with gasoil/fuel oil diffs remaining narrow. Ship-owners are planning on flushing their tanks sometime in September- December, depending on the route of the vessel. They will need to be IMO-compliant by January 22. As a result, we don t expect the IMO effects to kick in until later on this year.

6 FGE - Stormy Seas: IMO Bunker Repor December 21, 21 IMO Forward Curves and Forward Differentials Brent/Dubai Swaps (EFS), $/bbl NW Europe Product Cracks, $/bbl NW Europe HSFO Crack 1/17/219 1/3/219 11/1/218 ICE LS Gasoil vs. Brent NWE HSFO Swaps vs. HSFO Coal Parity Forward Curve, $/t European Hi/Lo (1%/3.5%S) Barge, $/t 15 2 NW Europe HSFO HSFO at Coal Parity ICE LS Gasoil 1/17/219 1/3/219 11/1/218 Sing 38 cst 3.5%S Fuel Oil Cracks, $/t 38 ICE LS Gasoil vs. Sing 38 cst Swaps, $/t /1/219 12//218 11/1/218 1/17/219 1/3/219 11/1/218

7 FGE - Stormy Seas: IMO Bunker Repor December 21, 21 IMO Compliance Monitor List from 21 st December 218 to 17 th January 218 Date of News Shipowner Newbuild/Retrofit Number of Ships Vessel Type Project Stage IMO Compliance Delivery Date (Announced) 12/21/218 Shandong Shipping Newbuild 2 Newcastlemax Order/Construction Scrubber Equipped 2 in 22 and 2 in /31/218 Evergreen Newbuild 4 2,5 TEU Order/Construction Scrubber Equipped 22 and /31/218 Navios Maritime Newbuild 4 VLCC Order/Construction Scrubber Equipped 22 1/5/219 CMB Newbuild 1 Liquidifed Hydrogen Carrier Order/Construction Liquified Hydrogen 2H22 1/1/219 ICBC Leasing (for Shell) Newbuild 1 MR2 Order/Construction Scrubber Equipped 22/221 1/1/219 1/1/219 Eships (Dubai Tristar Group) Central Group (Evangelos Pistiolis) Newbuild Handysize Order/Construction Scrubber Equipped 22/221 Newbuild 4 MR2 Order/Construction Scrubber Equipped 1Q22 (first two ships), 2Q (last two) 1/1/219 Polaris Shipping Retrofit 7 Capesize Order/Construction Scrubber Equipped 2H 219 1/1/219 Polaris Shipping Retrofit 3 VLOC Order/Construction Scrubber Equipped 2H 219 1/11/219 Kvarken Link Newbuild 2 Ro-Ro (pax) Order/Construction 1/15/219 Tianjin Southwest Maritime (TSM) LBG, LNG DFD and LIBs 4Q221 Newbuild 1 VLGC Order/Construction LPG DF 2H 221 1/1/219 Ineos Newbuild 2 VLEC Soon to be delivered Ethane DF 1Q219 1/17/219 Oman Shipping Newbuild 4 VLCC Order/Construction Scrubber Equipped Delivery by Feb 221 1/17/219 Meji Shipping Newbuild 4 MR Order/Construction Scrubber Equipped 2H 22 N.B. This list is not exhaustive. All information above is based on publicly-available information. Some figures are estimated. 219 FGE For queries, please FGE@fgenergy.com The dissemination, distribution, or copying by any means whatsoever without FGE s prior written consent is strictly prohibited.