Marine Fuel 0.5% futures trades suggest price surge for IMO-compliant fuels

Marine Fuel 0.5% futures trades suggest price surge for IMO-compliant fuels

Platts – 2.1.2019

Singapore — The first trades in financial derivative contracts that settle against Platts Marine Fuel 0.5% assessments are offering early cues to a surge in global shipping fuel prices heading into 2020, market participants said Friday.

Derivative contracts settling against the Platts FOB Singapore Marine Fuel 0.5% assessments traded for the first time Thursday, according to block clearing data published on the CME Group website.

Market participants say the traded levels for the December 2019 contracts validate widespread expectations of sharply higher prices of shipping fuel next year as the International Maritime Organization’s 0.5% sulfur cap for marine fuels takes effect from January 2020.

“It just shows how much stronger the market expects the value to go up by,” a Singapore-based fuel oil trader with an oil major said. “I’d expect quite an active trading interest from counterparties now that we have seen the first trades go through.”

Twenty lots, equivalent to 2,000 mt, of CME’s December Mini Singapore FOB Marine Fuel 0.5% (Platts) futures were block cleared by the exchange Thursday. The first trade for ten lots of Mini Singapore FOB Marine Fuel 0.5% (Platts) Futures for December was reported at $500/mt.

The contract was likely traded as a spread against ten lots of Mini Singapore Fuel Oil 380 CST (Platts) December Futures that was submitted for clearing at $320/mt at the same time. A second trade for ten lots of FOB Singapore Marine Fuel 0.5% (Platts) futures was reported at $517/mt.

The reported spread trade indicates a premium of $180/mt for Marine Fuel 0.5% over Fuel Oil 380 CST futures contracts for December. In comparison, Platts spot assessments for FOB Singapore Marine Fuel 0.5% cargoes averaged at a premium of $37.24/mt in January over the corresponding 380 CST HSFO assessment.

“At the moment we see Singapore 0.5% fuels pricing around a 10% premium to 380 CST HSFO, but as we get closer to 2020 we expect 0.5% pricing will switch from ‘HSFO premium’ towards ‘MGO discount’,” S&P Global Platts senior analyst Alex Yap said. “In 2020, we expect 0.5% will price at a relatively narrow discount to MGO (Marine Gasoil), but at a very large premium to HSFO with much wider overall light-heavy spreads.”

Platts assessed December 2019, 380 CST futures at $313.65/mt Thursday. Platts FOB Singapore cargo assessments reflect product loading 15-30 days from the date of publication and traders say the relatively small premium for Marine Fuel 0.5% now is reflective of market dynamics with little buying interest for compliant fuels from ship owners.

The lack of demand for 0.5% fuels currently has also been evident in the Platts Market on Close assessment process since Platts launched the assessment on January 2, with only oil major BP and Japan’s Mitsui submitting bids on a few occasions. On the other hand, Platts has published several offers to sell Marine Fuel 0.5% cargoes from BP, Mitsui and Spain’s Repsol over the same period, signaling greater selling interest.

“Premium of around $40/mt to high sulfur [fuel oil] is reasonable for a spot cargo now as there is no actual demand at the moment other than for low sulfur [fuel oil] from the utility sector,” a Singapore-based fuel oil trader with a Chinese major said.

“We are likely to see 0.5% low sulfur bunker demand emerging only from the fourth quarter this year … the spread is likely to widen from the second half of this year,” he said.

Traders say low-sulfur marine fuel demand had yet to emerge in the region even after Beijing imposed a 0.5% sulfur limit from January 1, 2019 for marine fuel burnt along its entire coastline, as much of the industry is complying by largely using low sulfur marine gasoil.

“Currently there just isn’t [any] liquidity [and only] sporadic purchases of 0.5% fuel from ships time to time,” a Singapore-based bunker trader with a European trading house said.

Platts new assessments reflect specifications for RMG fuels as defined by the International Organization for Standardization in document ISO 8217:2010 Petroleum products – Fuels (class F) – Specifications of marine fuels, but with a sulfur cap of 0.5%. The assessments reflect existing parameters for volume, delivery period, size and pricing basis for HSFO cargoes in Singapore and Fujairah.