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New 0.5% swap to limit bunker fuel price risk in 2019 as sulfur cap looms

London — Marine fuel traders now have the opportunity to hedge a 0.5% instrument against the drastic fluctuations that await the fuel oil industry before the impending 0.5% global marine sulfur cap in 2020, as the first indication of a new derivative instrument for 2019 that reflects fuel oil of 0.5% sulfur was announced this week.

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"This should be interesting, it's good for the fuel market," a broker said.

The market has so far lacked a 0.5% hedging instrument and at present traders are using ICE low sulfur gasoil futures, the fuel oil hi-lo -- the premium of 1% FOB NWE cargoes over 3.5% FOB Rotterdam barges -- and even crude futures to take positions in preparation for the International Maritime Organization's 0.5% cap.

New York Mercantile Exchange, or NYMEX, will list 11 marine fuel 0.5% futures contracts for trading on the CME Globex electronic platform on December 9, 2018, for trading from December 10, 2018, CME Group said Tuesday. Liquidity on the 0.5% swap contracts is as yet unknown, but traders point towards increased activity through 2019 as more clarity has been provided, with physical demand for 0.5% marine bunker fuel picking up towards Q4 2019.

"It will be interesting to see the uptake when they list [the contracts]," a fuel oil trader said.

Looking down the curve, after a period of weakness in 2020 the fuel oil market is expected to settle or strengthen as the market adjusts to the new regulations, sources said. The calendar 2019 3.5% FOB Rotterdam fuel oil crack was assessed Tuesday at minus $11.20/b, dropping to minus $18.9/b for 2020 before settling at minus $16.60/b for 2021, according to data from S&P Global Platts.

While hedging is an innate strategy of trading houses, not every bunker player prioritizes it. The uncertainty over product availability and price at various ports might incentivise hedging their bunker fuel price risk to reduce exposure to the volatility expected come 2020. Bunkering costs make a up significant portion of a shipowners' operational costs, therefore mitigating potential losses might become more of a priority as fuel oil costs rise.

The new contracts, which will be cleared via CME ClearPort, will settle against S&P Global Platts physical Marine Fuel 0.5% assessments, some of which will be launched January 2, 2019.

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The first listed contract is for April 2019. Monthly contracts will be listed for 2019 and the following three calendar years. Monthly contracts for a new calendar year will be added following the termination of trading in the December contract of the current year. Trading for the contract will end on the last trading day of the month.


--Edited by Jonathan Loades-Carter,