Scorpio Tankers says scrubbers to bring higher earnings on widening bunker spread

Scorpio Tankers is positioned to generate $77 million in time-charter equivalent earnings in 2022 based on the current $150/mt spread between 3.5%S high sulfur fuel oil and 0.5%S very low sulfur fuel oil, CEO Emanuele Lauro said Nov. 11.

Of Scorpio's fleet of 130 product tankers, 98 are fitted with exhaust gas-cleaning systems, or scrubbers.

"With our ECO and scrubber-fitted vessels we are well-positioned in an environment of rising fuel prices and widening spreads between grades of fuel," Lauro said. "Because of our investment in scrubbers this means at this current $150/mt spread the company will generate an additional $77 million of TCE in 2022."

The spread between HSFO and VLSFO, which has increased on the back of multi-year high bunker prices in October, is expected to widen going further into the fourth quarter and 2022, according to Lauro.

"We are conservative with that [earnings] number rather than assuming it will increase, like we expect," he said. "We see [the spread] increasing, given the oil market dynamics."

Medium Range tankers, which typically carry 38,000 mt cargoes, save around $1,867/d in TCE earnings with a scrubber, assuming a VLSFO/HSFO spread of $150/mt, Scorpio said. Long Range 1 tankers, which typically carry 60,000 mt cargoes, see TCE earnings increase to $2,091/d with a scrubber.

Increasing bunker prices, which peaked in the last decade of October, have widened the spread between VLSFO and HSFO bunker fuels. Platts data showed Houston ex-wharf 0.5%S bunker fuel peaked Oct. 26 at $615/mt, a 23-month high from when the cost was assessed at the same level Dec. 17, 2019. For Houston ex-wharf 3.5%S bunkers, however, freight peaked at $488/mt Oct. 19, showing a 25-month high, with the cost last assessed higher Sept. 16, 2019, at $495/mt.

The spread between VLSFO and HSFO in Houston in 2021 peaked Sept. 27 at $150/mt, and was last observed trading Nov. 11 at a spread of $125/mt, with ex-wharf VLSFO assessed at $586/mt and ex-wharf HSFO bunkers assessed at $461/mt.

Clean tankers have seen a quick rise in rates in the fourth quarter, due in part to lower refined product stocks, most of which are below the five-year average in the US, Europe and Singapore, Scorpio said.Additionally, the company expects stronger oil demand growth in the fourth quarter and 2022 will support a more bullish product tanker market going forward, it said.

Clean tanker freight, too, has been on the rise in the fourth quarter on the back of increased global oil demand, and in the Americas, increased exports from the US Gulf Coast. The month-to-date November average rate on the 38,000 mt USGC-Brazil route has increased 47.69% from October's $21.69/mt rate to $32.04/mt on Nov. 11. Spot rates on that route peaked Nov. 3-9 at 185 Worldscale points, or $33.08/mt, a six-month high from when the route was last assessed at the same level May 12.

Long-term product tanker supply outlook tight

Future product tanker supply fundamentals provide a bullish outlook for the spot freight market, with the orderbook near historical lows, Scorpio said. Additionally, Lauro said 32 MRs had been scrapped so far in 2021, with scrapping numbers projected to be the highest on record in that vessel class. For larger LR1 and LR2 tankers, three and eight units had been scrapped, respectively.

Newbuild prices for product tankers were up 20%-25% in 2021 in part due to a lack of space at shipyards, where newbuilds for other shipping sectors are booked far in advance, according to Lars Nielsen, Scorpio's commercial director.

"Tanker newbuild growth capacity is taken up by containers, bulkers and gas, so we feel well-positioned as the largest product tanker owners with a modern ECO fleet to take advantage of the next market cycle," Nielsen said.