Prices are high, daily volatility is high, and European bunker prices are higher than Singapore
JFour weeks ago we wrote that Singapore VLSFO prices were at an all-time high of $765/mt. Since then, Singapore prices reached $1,027/mt and Rotterdam prices were even higher at $1,109/mt. The reasons are obvious and fuel oil prices clearly continue to evolve in line with developments and expectations surrounding the war in Ukraine. We can only look at the microcosm of our own markets within the most extreme, widespread and horrific events in Ukraine, but bunkers are a global market, with crude prices tending to support our sector. Since hitting over $1,000/mt on March 9, VLSFO prices have retreated due to prospects of weaker Chinese oil demand due to the recent increase in covid cases and oil shutdowns. big cities. The potential for increased oil supply and the release of strategic stocks from other countries also rattled the market. However, the war in Ukraine continues and we still face huge challenges in such a volatile and uncertain market.
Bunker prices increased by more than $50/mt in one day
Not only have buyers and sellers in the bunker market faced this huge price spike since the Russian invasion, but daily trading volatility has been enormous. The chart below illustrates the price range and volatility of Brent month-ahead futures each day since early February.
Prior to the invasion, Brent futures were trading in the $80 range and the daily high/low spread was around $2/barrel. This equated to a daily price volatility of around $13/mt on bunkers. Volatility has surged since the invasion, with an average daily high/low range in the Brent market reaching $9/bbl, which equates to a daily move of almost $60/mt on the bunkers! This is still the case and a real challenge – At its peak Brent range ranged $20/bbl in a single day (March 9) and that was around $150/mt in the bunker sector . These developments have forced a change in the buy and sell bunkers, where prices can only be quoted on firm requests, price quote validities can last only a few minutes and all with much credit terms. stricter in a world of such high prices.
Rotterdam bunker prices are now at or above Singapore
Regional price variations are taking place and it is clear that Western Europe’s closer proximity to Ukraine and Russia has led to the unusual position of Rotterdam bunkers moving above Singapore quotes. This position of Rotterdam at Singapore prices or above is new and could continue, based on strong restrictions on exports of Russian crude to Europe. This is likely to happen either under current circumstances where companies are unwilling to take or sell Russian shipments, or through more formal sanctions. Either way, Europe is the market most vulnerable to the loss of Russian oil supplies, which has pushed prices in Europe even higher than in other international markets. Historically, VLSFO prices in Singapore have generally been $20-30/mt above Rotterdam. Towards the end of last year, crude oil prices rose and the VLSFO strengthened further against crude, pushing the premium from Singapore to Rotterdam to $60/mt. Events in Ukraine have unraveled all of that, with the Singapore and Rotterdam VLSFO awards now aligned.
The swing in the HSFO price relationship is equally dramatic. Historically, Singapore HSFO has been around $10-20/mt above Rotterdam. This climbed to around $45/ton last year, however, since the Russian invasion the relationship has completely reversed and Rotterdam prices are now higher than Singapore. So far this month, Rotterdam HSFO has averaged $14/mt higher than Singapore, with the current price relationship even more extreme and Rotterdam HSFO prices at $35 $/mt above Singapore
All bunker markets are threatened, Europe is the most exposed
These changes in prices and price relations are explained by the Russian invasion. At the end of last year, Russia exported around 5 million b/d of crude and 2 million b/d of products, with two-thirds of these volumes destined for Europe. In the Russian crude export market of 5 million b/d, around 3 million b/d went to Europe (via the Baltic Sea, Black Sea and Druzbha pipeline). The heavy reliance goes both ways, with the 3 million bpd of Russian crude entering Europe accounting for a third of all crude imports on the continent, underscoring the current narrowness of the European market. By comparison, Russian crude to the United States accounts for only about 5% of their total imports, and Russian trade to Asia has been much less affected. The same story is evident for petroleum products, with the majority of Russian exports going to Europe, and Europe depending on Russia for almost 40% of all its product import needs.
In fact, the Russian diesel/diesel export market also has a major impact on the Rotterdam market, with more Russian volumes on shorter routes to Germany and Poland, with lower volumes going further afield. west to France, the UK and Rotterdam. In addition, the European refining system cannot easily fill the Russian diesel/gasoil gap, either in modernization capacity or the limited ability to use alternative crude supplies. The situation is likely to worsen in the short term as European refiners begin their seasonal maintenance programs in the spring; even though some refiners may delay maintenance, this will not solve the European gas oil tightness.
Consequently, Europe’s heavy dependence on Russian crude and products has had a major and disproportionate impact on the relative prices of bunkers in Rotterdam, with price increases even greater than the sharp increases seen on other international markets. It is very difficult to see a rapid return to previous levels of Russian oil trade to Europe, and so this shift between European and Singaporean bunker prices could be a continuing feature for the time being. Currently, Russia has to cut its selling prices sharply to sell volumes of oil and it is likely that these volumes will end up in Asia. In the longer term, it will be the trade relationship between Russia and Europe, and any resulting changes in trade patterns, that will determine whether there is a structural change in the Rotterdam/Singapore price relationship. World trade is a balancing factor and we will have to see what happens to European fuel oil flows towards exports of products from Asia and/or the Middle East and whether these are drawn from eastern destinations towards western destinations.
Other things happening though, will take a “back seat”…
There are other factors influencing prices right now, including:
- The sharp rise in covid cases in China (to a 2-year high) and lockdowns in a number of major Chinese cities, including Shanghai;
- The global negative impact on oil demand from much higher oil, energy, food and retail prices, resulting in much higher inflationary pressures and lower GDP numbers;
- How the global oil supply and demand picture could evolve, with lower demand expectations, lower supply volumes from Russia and the OPEC+ group sticking to its current and limiting agreement any increase in supply, despite very high prices;
- What happens in the possible easing of Iranian sanctions.
Source: Integr8 Fuels