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Feature: Room for growth in VLSFO marine fuel prices as new futures contract looms

London — A month after the launch of S&P Global Platts physical assessments for 0.5% sulfur marine fuel and less than two weeks away from the launch of a new futures contract, the direction for the fuel's price looks to be upward.

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S&P Global Platts started assessing the very low sulfur marine fuel on a barge basis at Rotterdam January 2. Platts assessed the grade at $400/mt Thursday, $28.25/mt over its high sulfur fuel oil equivalent.

The price was informed by movements observed in other, related markets such as HSFO (3.5% sulfur), low sulfur fuel oil (1% sulfur) and vacuum gasoil (0.5%-2% sulfur). As there was little demand for VLSFO marine fuel observed in Rotterdam, price movements of distillate products were judged to be of lower relevance at this time.

The current narrow premium of VLSFO over HSFO should widen as the year wears on and demand for the fuel in Europe picks up, sources said.

"The way the market will work is that as the market gets tight and the option for buyers is between marine gasoil and 0.5% sulfur marine fuel, the 0.5% sulfur marine fuel will [move] close to MGO, less a discount," Chris Midgley, Global Director of Platts Analytics, said Thursday.

With MGO prices Thursday at $538/mt delivered, $158/mt over the HSFO price, that leaves room for VLSFO values to increase.

VLSFO prices at Rotterdam have been 12% higher than HSFO and 24% lower than MGO prices in January on average, Platts data showed.

2019 MARINE FUEL AVERAGE PRICES

HSFO MGO VLSFO
Rotterdam 359 530 401
USGC 390 605 415
Singapore 392 555 415

Unit: $/mt
Source: S&P Global Platts

Alexander Yap, Platts senior analyst, estimates that prices will switch from an HSFO premium towards an MGO discount, as 2020 approaches.

THE NEXT STAGE

The Intercontinental Exchange said Tuesday 0.5% sulfur marine fuel contracts would be launched for the first trade date of Tuesday, February 19, after being delayed due to the US government shutdown.

In December, ICE announced its intention to launch the contracts February 4 in preparation for the global marine fuel 0.5% sulfur from 2020, settling against Platts physical marine fuel 0.5% sulfur assessments.

Many companies have yet to release details of their VLSFO fuels or to sell them on the spot market. That said, the likely make-up of the new marine blend will be along one of two lines: nine parts gasoil to one part HSFO, or six parts gasoil to four parts low sulfur fuel oil (1% sulfur), Midgley said.

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The economics will depend not just on demand but also on the availability and prices of the component parts.

Some 3.6 million b/d of bunkers will be affected globally by the switch from HSFO, according to Platts Analytics, with 1 million b/d of existing high sulfur fuel oil demand replaced by blending lower sulfur residue with gasoil to obtain a 0.5% marine fuel. Two million b/d will require special blends but predominantly will be made using gasoil, and the remaining 600,000 b/d will remain as HSFO to meet scrubber requirements, according to calculations by Platts Analytics.

"Compared to Asia, post-IMO Europe will have increased shortages of gasoil and increased surplus of HSFO," Yap said Friday. "This suggests that compared to Singapore, Rotterdam will see deeper discounts for HSFO and higher premiums for MGO and 0.5% with wider overall MGO-HSFO differentials," he said.

Consultancy Wood Mackenzie believes that by 2020 the price differential between gasoil and HSFO will be roughly double the 2017 differential, Wood Mackenzie Vice-President, Refining, Chemicals & Oil Markets Alan Gelder said in September in an article on the company's website.

The gap between HSFO and MGO in 2017 averaged $166/mt, according to Platts data. Wood Mackenzie's prognosis, if applied to Platts numbers, would imply a spread of $332/mt between the two fuels in 2020.

-- Tom Washington, thomas.washington@spglobal.com

-- Eleni Pittalis, eleni.pittalis@spglobal.com

-- Edited by Jonathan Loades-Carter, jonathan.carter@spglobal.com