Swings and roundabouts in the fuel price game

It has been judgment day for the region’s bunker market. January heralded in a new era as strict low sulfur emission rules came into force for those operating to, from and in the Caribbean.

Strangely enough, then, it’s not the falling oil prices that were exercising the minds of shipowners. Welcome though these falls may be, it’s the cost of buying expensive Marine Gas Oil (MGO) instead of Heavy Fuel Oil – even its pricier, cleaner, lower sulfur variant – that’s making life tough. So at a time when it might be imagined that the shipping industry would be gaining dollars from lower operating costs, ‘low sulfur’ is snatching back these gains.

The Caribbean is at the forefront of these tough new restrictions. The United States Caribbean Sea Area is one of the four IMO-designated Emission Control Areas (EMAs), where the output of sulfur oxides is restricted.

The phasing out by the IMO of dirty, viscous and relatively inexpensive HFO is the catalyst for the change. And it’s easy to see why HFO is the bad guy here. HFO is estimated to be responsible for around eight per cent of the world’s global sulfur dioxide (SO2) emissions as well as a large slice of the local particulate matter found in some busy port cities.

Upside

But 0.1 per cent MGO is nearly two and half times more expensive than, say, 380 cSt Low Sulfur Fuel Oil (LSFO), which is still available across the US Gulf and the Caribbean. The upside is that MGO enables ship operators to easily meet the new low sulfur emission rules.

At time of writing, and emphasizing the difference in prices, benchmark Houston- delivered LSFO was selling at US$ 270 compared with US$ 627.50 for MGO.

It might be argued that if all operators are compelled to buy MGO then there is no competitive disadvantage is using gas oil. So what’s the problem? Some are concerned about enforcement and regulation across the Caribbean and question whether those at the margin will be able to circumvent the new rules.

In any case, much uncertainty remains in the wider shipping market about the medium- to long-term impact of low oil prices. The oil market is notoriously volatile and impossible to forecast, so while the industry may be enjoying ‘cheap’ fuel today, there is no guarantee that bunkers will be ‘cheap’ tomorrow. No hasty and potentially expensive moves are likely to be seen from one fuel type to another.

Analysts say the current low oil prices are unlikely to deter sales of a new generation of so-called eco ships now being built in South Korean and Chinese yards. Again, this is because the ever-tightening sulfur regulations mean that most operators will have to switch to pricier MGO and away from HFO, thus negating much of the current benefit from low bunker rates as additional EMAs are established.

It’s one thing for the IMO to introduce low sulfur regulations in the Caribbean; it’s quite another for the market to ensure there are sufficient supplies of MGO.

In fact, as a consequence, there are very real concerns that regional MGO production, for example, will fail to keep up with grow-

It’s one thing for the IMO to introduce low sulfur regulations in the Caribbean; it’s quite another for the market to ensure there are sufficient supplies of MGO.
In fact, as a consequence, there are very real concerns that regional MGO production, for example, will fail to keep up with growing demand as operators move away from LSFO. As a consequence, market forces will push MGO prices higher – even at time when energy costs are dropping overall and elsewhere. This means that the drive for ever more fuel-efficient vessels continues and this is the reason why orders for eco ships are not falling away.

Abundant option

Liquefied natural gas (LNG), newly abundant in the US and relatively affordable, could be an option for some shipping companies, although the lack of bunkering points in the Caribbean together with future uncertainty about prices have put the damper on a quick switch to gas as a means of propulsion.

The same goes for slow steaming. There seems to be no appetite for putting the pedal to the metal and there is no immediate sign that deepsea liner operators are going to ratchet up schedules on the basis of what may prove a short-lived downturn in bunker prices.

There is also the issue of CO2 emissions – something that seems to trouble some European carriers concerned about the industry’s image and about the perception that operating ships is somehow environmentally unfriendly. It’s a perverse view given that moving goods by ship by far outstrips any other method of transport in terms of its relatively low impact on the environment.
Yet the recent formation of the TridentAlliance – a mostly European ship owner/operator group eager to see sulfur regulations properly implemented and policed – is a clear example of the prevailing mood among the industry’s bigger hitters and their tacit support for the IMO’s new rules.

The Trident Alliances seems to take the view that the EMA’s are a welcome first step toward a global shift away from HFO (even LSFO), that the rules have major environmental benefits and, in any case, if all owners and operators have to pay a higher price for bunkers then it’s a price worth paying. It remains to be seen whether everyone in Caribbean shares this view.