BunkerEx’s Ishaan Hemnani has good news for scrubber buyers in his weekly column on fuel price differentials.
With 3.5% HSFO premiums in Singapore so strong (approximately $90 above September paper) due to diminishing supply, the difference to MGO and 0.5% fuel oil at the front has shrunk considerably.
However, if we assume premiums return to normal levels of +$30 by Q1, this gives a physical GoFo of $273. Where will 0.5% FO sit in this range?
There are several ways to imply this as we show in our table below.
If we carry forward the physical premium to 0.5% FO futures (+$70), we end up +$245 above 3.5% FO and $28 below MGO. Interestingly, this is exactly the same difference to MGO that we see in the spot market today.
The theoretical blend of spot 0.5% FO is 20% (3.5% FO) and 80% (MGO). Carrying forward the same blend to our implied Q1 2020 levels gives a cheaper fuel, just +$218 above 3.5% FO and $55 below MGO.
All this is good news for scrubber advocates where the payback starts to get interesting above a $200 differential between 3.5% FO and 0.5% FO. This difference is being dubbed the hi5.
Perhaps unsurprisingly given the high number of reports stating traders are storing 0.5% FO in Singapore, the contango (which incentivises storage) has all but disappeared with the curve relatively flat (note this is not the case in Rotterdam).
However, if you had tanks in Singapore and had the option of storing either type of FO, storing 3.5% would lose you $30 per month (September/October spread) so traders are opting for 0.5%. Perhaps people with 3.5% are counting on ever increasing physical premiums at the front to make up the backwardation.
Elsewhere, the prospect of trade negotiations between the US and China are keeping front month Brent around $60 despite recession warnings potentially causing lower demand. It’s worth noting the recession in 2008 caused oil to fall approximately 68% (from $140 to $45).