Futures market leads 2020 price discovery

Futures market leads 2020 price discovery

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.

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5 Comments

  1. Avatar
    Martyn Benson
    February 27, 2019 at 6:48 pm

    This article would have been much easier to understand and digest (and therefore more informative to the general Splash readership) if it had used less jargon and explained more things in context.
    What is EW? (East West?), what is FIS? Why have there been no physical trades of LSFO so far (there are low sulphur areas in Europe and the US) and, even if there have been no trades, the variance between $ 30 and $ 170 is not logical by any test.
    Why has LSFO no standard (technical or pricing?)?
    Remember, there are always more people wanting to learn than there are experts, so a public article should inform as well as report.

  2. Avatar
    Chris Hudson
    February 27, 2019 at 7:54 pm

    Hi Martyn, yes the EW is the East-West diff between Rotterdam and Singapore fuel oils, and FIS is Freight Investor Services a leading provider of impartial and accurate risk management advice to customers in dry bulk, tanker, steel and scrap, iron ore, fertilizer, fuel oil and air freight derivative markets and also provides physical commodity and shipbroking services.

    There have been no 0.5% Fuel Oil trades as the product currently has no demand as its not being used. There have been some private deals negotiated, but nothing publicly reported. There are low sulphur areas in Europe, U.S. and coastal China, but these restrictions require a 0.1% sulphur content gasoil.

    This lack of spot demand accounts for the disparity between the Feb19 spot index at $30 premium and $170 difference on future pricings for Calendar 2020 when demand for the 0.5% fuel oil is going to be at its highest.

    The problem of the standardisation of the LSFO 0.5% max sulphur content fuel has no identifiable standard is due to the opaque answers from refineries and oil majors. Will they be blending or using a product that is produced directly out of a refinery? This is yet to be answered and makes creating a industry standard difficult.

    Happy to answer any further questions and appreciate its quite difficult to get everything in an article to cater for quite a diverse audience.

  3. Avatar
    Barry Parker
    February 28, 2019 at 6:52 am

    I am a maritime futures pioneer from long ago- I enjoyed the article. For non futures folks, I could try to simplify it. The marketplace has in mind that the premium of low sulfur fuel over high sulfur fuel is circa $200 – $250 / ton- this is a level that prevailed in much of last year. Many of the listed company scrubber investments have been based on this type of number.

    A futures market gives you price discovery, you can see what buyers and sellers think that the price premium (also called a “differential” or even a “spread”) will be at various points in the future.

    The hysteria camp would be saying “I told you so” if the spreads go up to $300/ ton or maybe $400 / ton. The opposite camp, which believes that there will not be market disruptions because of IMO2020, will be saying “Another false alarm” if the spreads go down, like towards $100/ton.

    The futures markets represent opinions of buyers and sellers in the market, and, to me, are better indicators (dynamic in nature, also) than various pundits on the subject.

  4. Sam Chambers
    Sam Chambers
    February 28, 2019 at 11:58 am

    Nicely put, Barry. On so many levels it all reminds me of the Y2K scare at the dawn of the millennium

  5. Avatar
    Barry Parker
    February 28, 2019 at 10:28 pm

    Hi Sam
    Ah yes- Y2K. Add to that COFRs (circa 1996), and ECAs (circa 2012) and probably others that I can’t think of. Note that I am not taking a side on IMO2020, just saying that the futures market is a tangible and credible indicator of what the marketplace (with real live buyers and sellers of fuel, plus traders/ intermediaries) is saying. The “spread”, “differential”, or whatever we call it is an indicator that everyone should be watching as it encompasses fuel availability, blends suitability, scrubbers- all issues that will feature on a daily basis in the maritime news. 306 days to go.