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London — Discussions on European 2019 high sulfur and low sulfur fuel oil tenders are well under way, but some traders have reservations about being locked into the 2019 contracts due to the potential exposure to price volatility in the lead up to the implementation of the 0.5% global marine sulfur cap.

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The delivery period for the fuel oil tenders is typically between December 2018 and January 2020, but this would overlap with the introduction of the International Maritime Organization's 2020 global marine sulfur cap. The most recent tenders to be offered were the 1% low sulfur fuel oil contract from the Electricity Authority of Cyprus and Russian refiner Rosneft's high sulfur fuel oil 2019 fuel oil tender, both of which expire on January 31 2020.

The price of 1% fuel oil is expected to soar through 2019 as 1% fuel oil could become an attractive blendstock to produce compliant 0.5% bunker fuel, in addition to a utility feedstock. Refiners and blenders will need to blend expensive low sulfur components -- such as low sulfur vacuum gasoil and gasoil -- along with low/medium sulfur residuals -- such as 1% LSFO -- to comply with the 0.5% bunker specification.

On the other hand, 3.5% high sulfur fuel oil prices are expected to plummet as demand for the popular bunker spec sinks as it will no longer be a compliant marine fuel. This is unless an exhaust gas cleaning system -- or scrubber -- has been installed on the vessel which permits the continued burning of HSFO.

Looking at the hilo forward curve, the price spread on the Calendar 2020 contract between the 1% FOB NWE cargoes over the 3.5% FOB Rotterdam barges was last assessed at $103.25/mt compared with the current physical hilo of $4.50/mt.

In the HSFO market demand is expected to slide during the final weeks of 2019 as shipowners and those with tank storage begin to clean their tanks to load and store compliant fuel oil. Therefore stocks of compliant 0.5% sulfur marine fuel, whether it be marine gasoil or 0.5% very low sulfur fuel oil, will likely need to be accumulated by December 2019 in preparation for the January 1 deadline, and the relevant cargoes purchased in October for delivery in November.

"The tenders for 2019 are very contentious because they run into 2020," a fuel oil trader said. "In Q4 2019, people will begin to destock HSFO so what shorts would take the HSFO you are trying to shift."

Looking 1% LSFO, this product is currently used primarily for utility power generation purposes on Mediterranean islands, and is transported to the islands on sea-going tankers. However, the battle with blenders will likely see utility companies slapped with hefty premiums on their annual tenders by suppliers that know the islands will have to pay to power their grids and not lose volumes to the blending market, sources said.

In some circumstances, traders believe refiners will not want to be locked into a tender for a year when they can take advantage of spot opportunities and maximize margins in the blending market.

"I won't sell 1% fuel to the utilities, I have something which can be upgraded to 0.5% for a better premium," a fuel oil trader said.

On the other hand some refiners say the 1% utility market will prevail over the blenders market as the utilities will pay to keep the lights on and the difficulties of blending 1% into the 0.5% bunker pool.

Looking at the paper hilo curve -- the premium of 1% FOB NWE cargoes over the 3.5% FOB Rotterdam barges -- the premium of 1% LSFO climbs from around $11 in Q1 2019 to as high as $110/mt in December 2019, according to S&P Global Platts assessment data.

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

--Edited by Jonathan Dart, jonathan.dart@spglobal.com