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Bunker prices, already the highest they’ve been since 2012, are widely tipped to remain at severely elevated levels all year, leading to a greater swathe of the world merchant fleet deciding to slow steam where possible and forcing the hand of many vintage units towards demolition. The past week has seen crude prices remain at close to seven-year highs amid indications that the prompt physical crude market remains relatively tight while inventories in several major oil consumers languish at extremely low levels. Bullish sentiment has also come from simmering geopolitical tensions as Russian forces continue to mass near the Ukrainian border. Several market watchers have raised their short-term price expectations towards $100 a barrel. “As prompt prices have risen, so backwardation - when prompt prices are higher than oil for future delivery - has strengthened so that month time spreads are roughly double what they were one month ago,” analysts at BRS noted in a recent tanker report. While Brent crude has risen 11% this year to $87 a barrel, the price for Singapore very low sulphur fuel oil (VLSFO) bunker fuel has jumped 6% from $640 per ton to $680 yesterday. This will keep average speeds relatively low and will also incentivise scrapping of the older, less fuel-efficient fleet “Prices show no sign of slowing down,” said Ishaan Hemnani from online bunker broker, BunkerEx. Burak Cetinok, head research at broker Arrow, warned he sees bunker prices have the potential of going much higher from where they are currently, citing two main reasons for this prediction: the tightness in global oil markets due to years of underinvestment in upstream exploration and production capacity and, secondly, dwindling supplies of vacuum gasoil (VGO), which could push low sulphur bunker prices higher. VGO is a typically niche product and used as a feedstock in gasoline and VLSFO production. Heavy refinery rationalisation in Europe during the pandemic resulted in limited supplies of VGO. Demand for VGO is on the rise. Global gasoline demand surged during the pandemic and is expected to remain high in 2022. So will demand for VLSFO. “This fight between gasoline and bunkers could see VGO prices skyrocket in 2022,” Cetinok said. The Arrow analyst predicted: “High bunker prices would push freight costs for shippers higher and contribute to the global inflationary pressures. It would also force fleets to slow steam, especially in those sectors where vessel earnings are under pressure.” High bunker prices also benefit scrubber-fitted ships as they can continue to burn cheaper heavy fuel oil (HSFO) bunkers instead of VLSFO, Cetinok observed, something also pointed out by other executives contacted by Splash Extra. Christian Plum, co-founder of Scandinavian software company BunkerMetric, reckons the spread between HSFO and VLSFO will stabilise this year at between $120 and $170 a tonne, justifying a scrubber investment on most vessel sizes. “Elevated bunker prices are here to stay, and the VLSFO-HSFO fuel spread is likely to remain wide. It’s good for scrubbers,” said Randy Giveans , senior vice president of equity research at investment bank, Jefferies. “We expect this will keep average speeds relatively low and will also incentivise scrapping of the older, less fuel-efficient fleet,” Giveans said, adding: “In this high-priced bunker fuel environment, you want eco-ships, ideally with scrubbers, and we expect those vessels to massively outperform anything over 10 to 15 years of age.” Jack Hsu, managing director of Asian shipping line, Oak Maritime, said he anticipates this year’s bunker prices will be higher than 2021's on average, the silver lining being that this could drive a swathe of older tonnage to the demolition market. “If high bunker prices do prevail, and they coincide with a general and prolonged downturn in spot market, this will help accelerate scrapping this year, especially for those ships who have relatively poorer GHG, EEXI, CII ratings coming into 2023,” Hsu told Splash Extra. Alan Hatton, managing director of Singapore-based chemical tanker specialist Foreguard Shipping, concurred, saying higher bunker costs will be felt more acutely in sectors where rates are lower and trades are less profitable, making breakevens more sensitive to bunker costs. “Short term this will be an additional burden on spot trading vessels but with the current geopolitical situation I expect we will see very high volatility over the year,” said Erik Lewenhaupt, president of tanker firm Concordia Maritime, adding that if high prices persist over time it could serve as an opportunity to speed up the transition to alternative fuels.

Soaring bunker prices tipped to clear out older tonnage

High bunker costs are forcing owners to look at their fleet deployment plans this year.

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