When Russia invaded Ukraine, the price of ship fuel skyrocketed to all-time highs. Prices are still historically high, but they have now returned to prewar levels. Ship fuel is becoming less expensive as concerns about future demand weakness drive down the price of oil.
According to Ship & Bunker, the average price of very low sulfur fuel oil (VLSFO) — the fuel used by most commercial ships — on Friday was $685.50 per ton (based on prices at the top 20 refueling hubs). This is 39% lower than the all-time high on June 14 and comparable to prices seen in January.
The average price of high sulfur fuel oil (HSFO) — the fuel used by ships with exhaust gas scrubbers — was $457 per ton, down 32% from the high on May 5 and back to September 2021 levels.
Ship fuel prices are important to containerized cargo importers because shipping lines pass on fuel costs through bunker adjustment factors (BAFs).
Fuel prices are important in bulk commodity shipping because shipowners pay for fuel on spot voyages. Spot earnings for shipowners are net of that cost.
Meanwhile, the VLFSO-HSFO spread is critical for owners of scrubber-equipped ships. The greater the HSFO-to-VLSFO discount, the more scrubbers pay off.
Fuel surcharges for container shipping are decreasing.
DPI Signals reported container line BAFs for the first quarter of 2023 on Friday. The good news for cargo shippers is that BAFs are now dropping rapidly as shipping lines pass on fuel savings.
Zim’s (NYSE: ZIM) Asia-West Coast BAF will be 32% lower in Q1 2023 versus Q4 2022, falling to $720 per forty-foot equivalent unit. Evergreen’s Asia-West Coast BAF peaked in the third quarter of 2022. It will be 41% lower than that high in the coming quarter, at $443 per FEU.
Cosco’s BAF in the Asia-East Coast lane will fall 21% between Q3 2022 and Q1 2023, to $1,425 per FEU. CMA CGM’s BAF will fall 21% between the fourth and first quarters, to $1,098 per FEU.
Scrubber savings are volatile but persistently high.
When the new IMO 2020 regulation went into effect in January 2020, the spread between VLSFO and HSFO increased to more than $300 per ton. This regulation mandated that ships without scrubbers switch from HSFO to the more expensive VLSFO.
However, following the initial COVID lockdowns, the VLSFO-HSFO spread fell to around $50 per ton. This raised the question of whether the installation of scrubbers was a mistake. A spread of around $100 per ton is widely regarded as the point at which scrubber installations become economically viable.
The spread widened again in 2021 as oil prices and refinery utilization increased. When Russia invaded Ukraine, oil prices skyrocketed, surpassing the previous high in January 2020. On July 5, the average spread at the top 20 refueling hubs reached an all-time high of $420.50 per ton, according to Ship & Bunker data.
In recent months, it has retreated. On Friday, the spread was $228.50 per ton. Even so, scrubbers continue to pay off handsomely for shipowners.
As of Monday, a spot-trading, scrubber-equipped Capesize (a bulker with a capacity of around 180,000 deadweight tons) earned $9,400 more per day than a nonscrubber Capesize due to fuel savings, according to Clarksons Securities. The earnings of Capesizes with scrubbers that burned HSFO were 75% higher than those of Capesizes without scrubbers that burned VLSFO.
On Monday, a scrubber-equipped very large crude carrier (VLCC; a tanker carrying 2 million barrels of crude) earned $14,100 more per day in the spot market than a nonscrubber VLCC, a 26% premium.
What is causing the spread?
Stefka Weschsler, marine fuels editor at Argus, spoke with American Shipper about what’s driving the spread and what might happen if the EU bans imports of Russian refined products.
“Russia exports more HSFO than VLSFO,” Weschsler explained, “but Russia also exports distillate fuel, which is used as a blend stock to make VLSFO.” VLSFO prices increased in the Amsterdam-Rotterdam-Antwerp (ARA) bunkering market after the war began, while HSFO prices decreased. The spread reached new highs in July “as a result of distillates availability erosion.”
The spread fell this autumn because the price of VLSFO fell faster than the price of HSFO. According to Argus data, VLSFO prices in ARA fell 25% between July and November, while HSFO prices fell 18%.
VLSFO pricing fell faster than HSFO as “Northwest Europe reshuffled its VLSFO sources, importing from the US Gulf Coast, Gabon, Algeria, Tunisia, the UAE, and Argentina,” according to Weschsler.
When asked about the EU ban on Russian product imports, he said, “Market views are divided.” Some believe that now that Russian distillates are no longer available in the EU market, ARA VLSFO prices will outpace HSFO prices [widening the spread].”
“Others believe the spread will narrow once all Russian HSFO stocks in the ARA are depleted,” he said. In other words, decreased HSFO supply raises HSFO prices relative to VLSFO.
Future scrubber installations will be fueled by container shipping.
Scrubber installations make the most sense on large-capacity vessels traveling long distances. Installations are less expensive in new buildings than in retrofits.
According to Clarksons Research, scrubber use has increased dramatically in the last two years, but the majority of future installations will be on newbuilds, primarily container ships.
When IMO 2020 went into effect in January 2020, 35% of all VLCCs on the water or on order had scrubbers installed or planned to install. The VLCC scrubber share had risen to 48% as of Monday.
However, the number of future VLCC scrubber installations is limited. With only 27 VLCCs on order, the orderbook is extremely small. Only 26% of those will have scrubbers installed. Only 19 VLCCs (2% of the fleet) have scrubber retrofits planned.
The proportion of Capesizes with scrubbers or planned installations increased from 35% in January 2020 to 42% now. The low orderbook, as with VLCCs, will limit future installations. According to Clarksons Research, only 19 of the Capesizes on order (16% of vessels under construction) will receive scrubbers, and only 11 currently operating Capesizes have retrofits planned (less than 1% of the fleet).
In terms of fleet share, the container shipping industry has been the most aggressive scrubber adopter. The proportion of container ships with a capacity of 12,000 or more twenty-foot equivalent units that have scrubbers or plan to install scrubbers has risen from 52% in January 2020 to 59% today.
In contrast to VLCCs and Capesizes, newbuildings are important because container shipping now has a historically large orderbook. According to Clarksons’ data, 140 container ships with a capacity of 12,000 TEUs or more are on order with scrubbers, accounting for 46% of ships under construction in that size category.
