Singapore — Singapore-based companies have started preparing to supply marine fuel with maximum 0.5% sulfur by taking VLCCs as floating storage.
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Around 1 million mt of components to make 0.5% sulfur fuel are floating offshore Malaysia and Singapore, market sources have said.
"Three to four VLCCs are taken as LSFO storages," a Singapore-based fuel oil trader at a Western trading company said. "The stocks are mainly low sulfur fuel oil components. There should be some middle distillates and low sulfur crude oil."
International Maritime Organization regulations mean the global cap on sulfur content in bunker fuel will be cut to 0.5% from January 1, 2020, from the current 3.5%. The majority of bunker fuel demand was expected to shift to low sulfur fuel oil or marine gasoil for what is widely called IMO 2020.
VLCCs have found favor with traders looking to store low sulfur components due, in part, to the vessels having onboard heating facilities -- low sulfur components in Asia typically have a high pour point, which requires these materials to have heating facilities in the supply chain.
Even so, the availability of low sulfur fuel oil materials within the region was relatively limited, sources said, given the scale of demand for bunkering and the potential need to have to switch to low sulfur-complaint fuel from high sulfur bunker fuel.
Market sources estimated 200,000-300,000 mt per month of low sulfur material, which includes components like slurry, vacuum residue, LSWR, decant oil, light cycle oil and vacuum gasoil, would be traded within the region.
FUTURE VALUATIONS JUSTIFY STORAGE
Demand for bunker fuel with a maximum 0.5% sulfur limit is only beginning to trickle in from shipowners looking to test the product for sea trials, with interest expected to pick up going into the fourth quarter, traders said.
But a widening spread between HSFO and gasoil going into 2020 has prompted companies to start storing low sulfur material, traders said.
"They are looking at the spread between gasoil and HSFO," said a second Singapore-based fuel oil trader at a western trading company. "They are expecting the prices [of LSFO] will go up, expecting to make money buying the components now...but nobody knows if they can really make money."
The spread between 10 ppm gasoil and 380 CST HSFO averaged $205.88/mt for the third quarter, while it stood at $287.97/mt for the fourth quarter, S&P Global Platts data showed.
Companies outside Asia have also started storing low sulfur product in preparation for the shift to compliant marine fuels.
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A major European tanker company had started using two ULCCs to store low sulfur marine fuel to meet its own demand going into 2020, sources at a shipping company said, adding the vessels were in the Mediterranean/Atlantic region.
NEWBUILD TANKERS TAKEN TO MOVE/STORE MGO
In the low sulfur marine fuels complex, it is not just LSFO which has been gaining traction but also marine gasoil (MGO).
"In terms of gasoil, what is being stored [at the moment] is more marine gasoil and components for fuel oil," an Asian gasoil trader said. "There is still a long way to go till IMO 2020 is enforced, so I think the focus first would be on fuel oil and the accompanying components," he said.
Other gasoil market participants agreed, but said that while marine gasoil or LSFO would be the likely products being stored for now, some could be considering storing gasoil.
"To store gasoil now, the storage cost would kill you as the market structure is not in a contango, so it cannot pay to store. But if you assume that gasoil is going to be priced much higher in 2020, then the potential upside is high," another source said.
To that end, companies have been increasing their average gasoil inventory levels, said one of the brokers tracking such deals.
While that material will be sold and consumed in the coming months, it will be replenished in quick succession, implying a bigger buy-store-sell-consume cycle than of late.
At least seven newbuild VLCCs and 14 Suezmaxes have been taken by trading and refining companies this year in different charters to move and store gasoil, according to shipping brokers' estimates.
Meanwhile, it has become increasingly common to test and use gasoil volumes as marine fuel. Demand for MGO can at least double next year, said Ralph Leszczynski, Singapore-based director for research for Banchero Costa, a global shipping brokerage and consultancy.
Leszczynski also said Asia had a surplus of gasoil and most of that volume will move to Europe in the run-up to the implementation of IMO 2020.
"We are moving into a situation where Europe will be surplus in high sulfur fuel oil and [have a] deficit in low sulfur fuels," he said, adding: "A substantial portion of this demand will be met by moving marine gasoil from North Asia to Europe."
Newbuild VLCCs and Suezmaxes assumed importance here, moving gasoil from North Asian storages on their maiden voyages, to avoid ballast costs. said a tanker broker tracking such deals.
China's recent announcement of new export quotas for oil products, including gasoil, have also given a fillip to this trade. Earlier this year, falling VLCC freight rates amid ample supply also supported the trend, said a dirty tankers' broker in Singapore.
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