Managing uncertainty in the bunker fuel market

The price of crude oil is at a five year low, but volatility in fuel oil is at a five year high. It’s a situation that more shipowners and charterers should be paying attention to, says FIS managing director John Banaszkiewicz.

The fundamentals of the crude and fuel oil market have been upended by the shale oil revolution in the United States and the determination of Saudi Arabia to destroy the fledgling industry by opening the pumps. As a result the crude market is in free-flow with no OPEC policeman to control supply.

But Banaszkiewicz believes that too many owners and charterers are focussing on what they perceive as low fuel prices and failing to protect themselves from volatility by fixing forward while the opportunity lasts.

“No shipping pundit is forecasting a quick return to sustained better dry bulk markets and the consensus is for a long path to recovery,” says Banaszkiewicz. “But both owners and charterers have a weapon they can use in the short term, fixing their bunker fuel and taking the volatility out of their biggest operating cost.”

The scale of the collapse in crude and fuel prices is beyond doubt. Brent crude fell from an average of $99.44 a barrel in 2014 to stand at $49.20 on 6 October 2015. The average price differential for 2014 versus 2015 is minus 44%.

Singapore 380cst fuel oil averaged $557 per tonne in 2014 but the spot price stood at $226 per tonne on 6 October, 2015.

At the same time, the volatility of fuel oil prices has increased dramatically. In 2014, 20-day volatility in Singapore 380cst was 13.03%. Year to date in 2015, the same market has seen volatility increase to 40.03%.

“A 180,000dwt Capesize spends an average of 244 days a year at sea and consumes an average of 62 tonnes of fuel per day so this is an issue for charterers as well as owners. Not managing your bunker exposure has the ability to directly impact the balance sheet,” adds Banaskiewicz.

Recent technical analysis suggests that crude oil could end its long-term downtrend during Q4 and where crude leads, fuel oil is bound to follow. Banaskiewicz believes shipping is missing a trick to impose financial discipline on fuel purchases in the same way as the airline industry has done with jet fuel.

“Michael O’Leary, the boss of Ryanair said recently you don’t need to be the best at buying fuel, but you want to be the one who has the price certainty. At the moment, too many shipowners and charterers alike are giving that certainty away.”