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Highlights

VLSFO-HSFO spread at all-time lows

Analysts still see merits of scrubber investment

Delays in installations may work in shipowners' favor

London — The price gap between premium shipping fuels, such as VLSFO and its dirty counterpart HSFO has narrowed to all-time lows. With global oil demand having collapsed due to the coronavirus pandemic, shipowners planning to invest in equipment to use high sulfur fuel oil in their engines are having second thoughts about whether the payback economics still work. The stakes are certainly higher but analysts suggest the long-term gamble could still come off.

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Market participants have been pondering various options to comply with the International Maritime Organization's rule brought in at the start of January that shipping fuels must only contain 0.5% sulfur, namely through clean fuels such as very low sulfur fuel oil or via the once-popular HSFO and run it through gas exhaust cleaning systems known as scrubbers.

However, the bottom has fallen out of oil demand, with S&P Global Platts Analytics estimating a fall of 4.5 million b/d in 2020, prompting a sharp decline in 0.5%S bunker fuels, while prices of 3.5% HSFO prices experienced an unusual revival due to the fuel's limited availability. These combined factors have narrowed premiums between the two grades by more than 80% since the start of the year.

In Northwest Europe, the premium of VLSFO delivered bunker fuel at Rotterdam over HSFO narrowed to all-time lows of $43/mt Monday, contracting 85.5% since January 2, S&P Global Platts data shows. The premium has averaged $83/mt so far this month, from an average of $233/mt in January. Similar dynamics have been noted in the Mediterranean.

However, analysts have said market uncertainty is limiting the true understanding of current scrubber economics. While many could become more reluctant to make the hefty outlay for potential long-term gains, scrubbers will still play a niche but key role, especially since bigger players prefer to spread risks between the various fuel options among their fleets.

"Even before this epidemic, shipowners were cautious in making further scrubber investments until the longer-term picture became clearer," said Richard Matthews, director at shipbrokers E.A. Gibson. "When things return to normal it will all depend on where the spreads are."

International shipping association BIMCO remains supportive of scrubber installations despite the narrowing spread: "The price spread is not to be seen this low for the entirety of the future. When [or] if oil markets tensions ease from current highs – and the world starts to normalize post-corona, the pricing of fuel will also return to its standard [differentials to] crude oil," BIMCO analyst Peter Sand said.

"Investors in scrubbers know what they are doing financially, buying themselves a device that cuts fuel cost permanently... the device will likely return the investments many times over," Sand said.

MORE COMPLICATIONS

Platts Analytics estimates there are 2,520 scrubber systems consuming about 600 million b/d of HSFO as of late February, up from 2,240 systems at the end of last year. It notes that the coronavirus is also causing an impact on labour availability at scrubber yards for installation.

"There are another 1,000 installations planned over the balance of 2020, which will increase the number of installations to about 3,500 by the end of the year, consuming about 850 million b/d of high sulphur bunkers. We are assuming any slowdown in the near term will be made up later in the year as the labour situation in China and economic activity in that country return to normal," it said in a research note earlier this month.

There had been reports of cancellations of scrubber installations for two reasons, a bunker source said: "One, because [shipyards] can't install because of the coronavirus, and two, as some shipowners think 0.5% prices are here to stay so there's less payback [for scrubber investments]," the source said. "Nobody can foresee what's going to happen so it makes it difficult to plan things."

"We believe that a VLCC being retrofitted with a scrubber will now take over four years to pay off the investment if fuel prices remain at today's levels, a significant gamble for the owner," tanker market intelligence company Alpha Tanker said in a research note. "Installations due to be carried out in Chinese yards were already being delayed in the wake of COVID-19 and now following stellar returns for tankers, some owners are reportedly delaying or even, where possible, cancelling installations," it said.

The research also suggested that owners of bulkers or liners struggling amid the global downturn are also cancelling scrubbers as they strive to cut costs. "We fear that this is just the tip of the iceberg and as the global recession intensifies during the second quarter, this drip of cancellations could turn into a flood," Alpha Tanker said.

Norway-based shipping and logistics company Wallenius Wilhelmsen has cancelled four scrubber installations to reduce its capital expenditure, among other swift measures, as its gears up for tough market conditions amid the coronavirus pandemic, the company said in a statement Monday. "Wallenius Wilhelmsen is taking decisive steps to prepare for a challenging time ahead," it said.

HSFO'S UNUSUAL REVIVAL

Limited availability of HSFO reaching the bunker pool has been noted by various market players since IMO 2020 took effect. In particular, the number of ports supplying HSFO globally has halved in the three months between December and February, marine fuels management company Integr8 said in a recent publication.

In addition, over three times as many ports were supplying VLSFO than HSFO in February, according to data from Integr8.

Fuel oil sources have highlighted their concerns over availability of HSFO at bunkering ports; in which case, acquiring product is better to be set ahead of time to ensure availability, as spot volumes are heard to be lacking. Sources have reiterated, however, that the support HSFO is seeing of late is more due to tight availability. Outside of the bunkering market however, HSFO has found an outlet as a coker and petcoke feedstock. This has aided in providing support for the product.

The support in the HSFO physical flat price has been reflected in the crack spreads to crude oil. "While the sharp slide in crude prices towards $20/b has compressed price spreads for refined products, HSFO crack spreads have also risen in part because outright prices may have touched their floor (for the time being) and crude prices sank further," Platts Analytics said.

The 3.5% FO FOB Rotterdam barges versus Brent crack for the front month was assessed at minus $10.156/b Tuesday and has gradually strengthened since the implementation of IMO 2020 as availability of product has waned. In comparison, the crack was seen as a low as minus $33.431/b on November 29 before the new sulfur regulation was enforced.

But whether HSFO remains this high is in question, especially as Saudi Arabia is likely to flood the market with sourer crude after the breakdown of OPEC's production cut pact with Russia. The sulfurous crude could lead to a greater amount of dirty fuel oil and widen the spread again, analysts have said. Those already with scrubber investments are certainly in for a volatile ride.