The IMO2020 fuel oil spread: China to the rescue?

FIS Fuel Oil Derivatives broker Chris Hudson takes a look at the early 2020 action and identifies an unlikely source of relief for the shipping market

VLSFO derivatives basis ex-wharf have been slowly growing in liquidity with Feb pricing at around a $260 premium to HSFO prices in Rotterdam and Singapore. Compared to gasoil, the Feb VLSFO is currently a $65 discount for Rotterdam and a $9 discount in Singapore.

This is not such pleasant reading if you work in the physical fuel department and are having to contend with all the problems of implementing IMO2020.

The physical market is dealing with huge premiums for the new low sulphur product, which is sitting just under, and in some cases even above, gasoil prices that were meant to have acted as a cap on prices.

As a cap then, it’s been pretty useless, unless you use it to hide the egg on your face if you had predicted the effectiveness of the gasoil cap.

What is seemingly driving this huge premium for the new product is one major factor: that there simply aren’t enough barges to cater for the bunkering demand required. This is the bottleneck that has pushed up prices and means that physical providers can charge what they want for a product that is so desperately needed.

But have no fear, here comes the Chinese cavalry! Beijing is believed to have approved a long-awaited tax rebate on fuel oil, paving the way for domestic refiners to supply bunker fuel to ships plying the international community.

Chinese refiners have capacity to produce 18.5 million mt/year of VLSFO but have not been able to compete in the international market due to government tax.

This rebate will not only bring more product into the market but will hopefully then start to bring down prices generally, especially in Asian shipping hubs.

So there we have it, prices are high, exacerbated by a lack of barge capacity, but there could be a bit of saving grace from the Chinese producers.