No 2020 VLSFO supply crunch expected due to COVID-19

This year is unlikely to see any supply crunch in the very low sulfur fuel oil market because of the unexpected demand destruction caused by the coronavirus pandemic, according to analysts from tanker market intelligence company Alphatanker.

 

“The demand-destructive effects of COVID-19 have ensured that there will be no VLSFO supply crunch,” the analysts wrote in a note.

The market had been geared up for “strong demand and tight supply” in the wake of the IMO 2020 low sulfur cap on marine fuel.

 

But the predicted impact of the new regulations has been reversed by the coronavirus outbreak, which has resulted in a drop of global bunker demand.

 

“The market feels like it’s on pause,” one trading source said Friday. “There have been bits and pieces [of demand], but most people are trying to figure out what is going on.”

 

VLSFO prices have subsequently tumbled 63%, after 0.5% FOB Rotterdam barges hit an all-time high January 3 of $576.25 before more than halving to reach $211.75/mt as of Friday, according to S&P Global Platts data.

 

The price drops have been further exacerbated by the falling crude prices. with benchmark Dated Brent falling by over 50% since the beginning of March.

 

“Evidently, when the price of the underlying commodity is low, it is difficult for [VLSFO] fuel prices to strengthen,” Alphatanker said.

 

STORAGE CONCERNS

Many in the market have been watching the steepening VLSFO contango, which has incentivized storage amid nearly absent demand.

 

“Demand is still thin [for VLSFO], but the contango is growing,” one trader said.

 

Using the paper market as a reference, the 0.5% FOB Rotterdam cargo swaps structure between balance-month and front-month volumes was assessed in a $5.75/mt backwardation on January 3, when the outright barge price hit an all-time high. This has since flipped into contango and was assessed at minus $6.25/mt on Friday.

 

With a similar steep contango throughout the rest of the forward curve for 2020, concerns are mounting that there will be lack of storage.

 

“Storage is still there, but I think we need to go to floating storage economics as it all fills up,” one trader said.

 

But according to another source, floating storage would be too expensive.

 

Alphatanker said it expects VLSFO supply to ramp up later in the year as “more comes out of China due to tax shifts”, although market sources suggested that there may be some shorter-term comfort from refineries cutting runs or even shutting operations altogether.

 

Source:Platts

 

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