With the sulphur cap just 131 days away, Ishaan Hemnani from online platform BunkerEx launches a weekly column today looking at fuel price differentials.
With 0.5% fuel oil swaps still lacking liquidity, extrapolating 0.5% fuel oil premiums today up the curve makes it look very expensive (only $3-13 under gasoil as shown in the table below).
It seems in reality that 0.5% fuel oil is anchoring off the more liquid 3.5% fuel oil or gasoil, pricing approximately $30-40 under gasoil and $200 above 3.5% FO. However as the gasoil 0.1% to HFO 3.5% spread (GoFo) widens in 2020 by $60, both cannot be satisfied:
3.5% FO plus $200 = gasoil minus $90/mt in Q1 2020
Gasoil minus $30 = 3.5% FO plus $260 in Q1 2020
There is an argument for both, as whilst owners with scrubbers will be looking at the 0.5% versus 3.5% fuel oil differential, the rest of the market can only lift 0.5% fuel oil or MGO. Perhaps it ends up as some blend of the two quotes (current physical indications suggests that would be 19% 3.5% FO and 81% MGO).
Looking at more immediate concerns for shipowners, physical premiums in Singapore continue to be very strong (+$56) as supply of HSFO continues to deplete whilst demand stays steady. As we approach Q4 this might only get worse as barges and tanks are cleaned in preparation for 0.5% fuel oil, and shipowners will still want to burn 3.5% fuel oil at $200 cheaper until they absolutely have to switch.