NEW YORK/SINGAPORE (Reuters) - The price of very low-sulfur fuel oil (VLSFO) has risen in recent months, a sign of increasing worry there is not enough of the fuel to comply with new global shipping laws that took effect this year, market participants said.
VLSFO has lately started to trade at levels comparable with marine gasoil, a type of diesel fuel used by tankers.
That is an indication that refineries may need to increase production of VLSFO as tankers shift from dirtier, high-sulfur fuel to a cleaner product to comply with International Maritime Organization regulations designed to reduce smog.
Under those rules, shippers either need to use fuels with a sulfur content not exceeding 0.5%, or install scrubbers that can clean higher-sulfur fuels to reduce emissions. The rules, known as IMO 2020, affect more than 50,000 merchant ships worldwide.
Supply has tightened in trading markets in Asia and Europe and now in the United States. On Wednesday, VLSFO in Houston traded at $642 per tonne, compared with $667 per tonne for marine gasoil, S&P Global Platts data showed. That $25 spread was at $152 half a year ago.
This suggests not enough VLSFO is being produced and raises concerns about supply this coming spring when refiners go into maintenance season, said Rick Joswick, head of oil pricing and trade flow analytics at S&P Global Platts in New York.
The spread in Singapore has narrowed to $15, while in Rotterdam it has narrowed to $3, S&P Global Platts data showed.
“China has been importing VLSFO from Singapore. Hence, tightening up the regional supply of the cleaner marine fuel,” a Singapore-based middle distillates trader said.
Chinese marine fuel suppliers have signed up short-term deals to purchase VLSFO from companies such as oil major Shell, Germany’s Uniper and U.S. commodities trader Freepoint.
“VLSFO prices around Singapore is around $150 (per tonne) more than Rotterdam. So, there’s definitely a lot more consumption here ... I think VLSFO should continue to trade at higher levels for some time,” a Singapore-based ship-broker said.
Meanwhile, VLSFO stocks are also falling, Joswick said.
“You can’t cover demand out of inventory forever,” he said. “Production has to pick up and trade flows have to shift.”
(For interactive graphic on Marine fuel spreads, click here)
“It means marine gasoil (MGO) needs to be called upon to cover some of that demand,” Joswick added.
But some shipowners and operators, especially those with larger ships, strongly prefer VLSFO over MGO because of technical issues related to running on distillate fuel as opposed to heavy fuels.
“Fuel oil has better calorific properties and better properties on the engines that MGO cannot provide. That’s why shippers are reluctant to make the switch even though VLSFO prices are now marginally higher than gasoil,” the Singapore-based trader said.
The spread between VLSFO and high-sulfur fuel used by shippers that installed scrubbers was $330 per tonne in Singapore and $272 per tonne in Houston, S&P Global Platts data showed. That spread was greater than shipowners expected, benefiting tanker operators that installed scrubbers, shipping sources said.
VLSFO demand could prompt refiners to increase supplies later this year, said Andy Lipow, president of Lipow Oil Associates in Houston. “This is a nice, high price for VLSFO. We’ll reach some new equilibrium,” he said.
Reporting by Koustav Samanta in Singapore, Stephanie Kelly in New York and Collin Eaton in Houston; Editing by Dan Grebler and Sherry Jacob-Phillips