Chris Hudson, a fuel oil futures broker with Freight Investor Services, gives readers an idea of the bunker price spread.
With the fog of uncertainty still surrounding pricing of compliant marine fuel as we approach January 2020, fuel oil futures can now give some sort of marker on where we expect 0.5% fuel to price.
The initial 0.5% Singapore Marine Fuel futures trade, brokered by the FIS Fuel Oil desk last month was done at a $200 differential to High Sulphur Fuel Oil and since then, the market has narrowed to around the $180-185 level. The 0.5% Rotterdam Barges difference is pricing slightly lower at about $170.
With the launch of the 0.5% East-West and new crack markets by the middle of 2019, all the components of this new oil products market will be in operation. The EW and crack will allow market participants to price 0.5% fuel directly from crude oil futures, rather than relying on a difference to the well-established High Sulphur Fuel Oil.
Independently trading the fuel oil crack [the cost of turning a barrel of crude oil into fuel oil] will force transparency on what the costs are to refiners of producing this new grade. This is more transparent than the current ‘difference’ method, which is much more opaque, and could exploit the ever tightening supplies of High Sulphur fuel as we approach January 1 2020.
The EW differential will similarly shed light on what the market is pricing for regional irregularities between two of the major bunkering ports in the world in Rotterdam and Singapore. This EW usually demonstrates cheaper fuel prices in Europe due to the glut of refined fuel oil products on the continent compared to Asia. However, a tightening may indicate changes in the traditional supply and demand dynamics.
By the middle of this year, the market should have more clarity on where to price 0.5% fuel futures as these elements of the new 0.5% fuel oil market mature. We will hopefully also then have more liquidity and therefore accuracy for the physical Platts Index.
FIS will continue to help the market develop by providing forward curves in anticipation of the launch of new 0.5% fuel oil Exchange contracts. We hope that now the first futures trade has printed, more market participants will feel confident to enter the market with firmer pricing that supports price discovery.
It should be noted that the current Platts LSFO index numbers are pricing 0.5% Rotterdam and 0.5% Singapore levels at around a $20-30 premium to HSFO. This may seem surprisingly low compared to spread in the derivatives market, however the physical market has not yet had a single trade reported publically.
The monthly index averages for January 2019 physical 0.5% Marine Fuel Oil were FOB Sing 412.259, Fob Fujairah 402.602, FOB USGC 412.672, Delivered USAC 428.779 and FOB Rotterdam 400.148.
This in practice means the index is pricing something that has no current demand, on a grade of fuel that has no international standard. This explains the huge disparity that currently exists between the physical index prints and futures pricing for 2020. It is a gap we expect to close as we draw closer to January 1, 2020, suggesting that activity on both physical and futures could pick up very quickly once pricing begins to be published and more futures trades are concluded.
This market has many obstacles to overcome before we have a fully functioning physical 0.5% bunker market. Hedging using this new fuel oil futures contract listed on both CME and ICE can at least provide some peace of mind on the financial risks that IMO2020 poses. Unfortunately there’s not much we can do to help with the operational risks.