The premium of very low-sulphur fuel oil (VLSFO) to high-sulphur fuel oil (HSFO) will remain narrow in the coming months, with low Opec+ supply and lockdown measures in many countries, Bank of America has forecast.
Such a development would lead to prolonged weakness in the investment case for exhaust gas cleaning systems, sales of which have been weak this year despite the IMO 2020 switch.
“Covid-19 has been the great equaliser for the fuel oil market this year, completely reversing IMO 2020 trends,” the bank said in a research note.
Virus impact
From January, nearly all vessels in the global fleet are required to run on VLSFO rather than HSFO unless they are installed with scrubbers.
Ship & Bunker data showed the global average VLSFO price was $306.5 per tonne higher than HSFO at the beginning of 2020, reflecting how the regulation affected bunker fuel markets.
But the premium has since sharply narrowed as the coronavirus pandemic rampages across the globe, leading to a collapse in demand for transport fuels due to lockdown measures.
Refineries have, therefore, hiked VLSFO production at the expense of gasoline output, as demand for seaborne trade falls less than road travel during the pandemic, Bank of America said.
“Fuel oil demand held up well even though trade plunged,” said the bank, adding that global port call activity dropped by nearly 20% on year in April and May before recovering steadily.
Meanwhile, the Opec and its Russia-led allies responded to the oil demand collapse by reducing their combined crude output by 9.7m barrels per day (bpd) in May and June, before a 2m-bpd increase since July.
“Opec+ cuts, which consisted of mostly medium and heavy sour crudes, constrained HSFO supplies,” the bank said.
Continuing trend
Looking further, the producers are expected to delay their second output hike of 2m bpd scheduled in January, with renewed lockdown measures in many countries during winter.
This is set to result in continued weakness in the VLSFO price and strength in HSFO in the coming months, Bank of America said.
“[VLSFO] is again trading at a premium to gasoline and gasoil. This could lead to more supply and weaker VLSFO…especially if lockdowns cause another dip in gasoline consumption,” the bank added.
According to Ship & Bunker, the premium of VLSFO to HSFO stood at $57.5 per tonne on Monday before falling below $50 in late October.
With the narrow spread suggesting longer payback periods for scrubber investments, major manufacturers have reported lower sales of the equipment this year.
In its last quarterly report, Wartsila said the scrubber market remained “characterised by a high degree of uncertainty due to the Covid-19 pandemic and the subsequent turmoil in the global oil markets”.
Tom Erixon, Alfa Laval’s president and chief executive, admitted last month that the scrubber order intake was slower than 15 to 18 months ago.
But he emphasised in a conference call: “We have to say that the scrubber business is probably down towards the level where we expect it to be for a while…The scrubber is low and probably reached the bottom.”
