Shrinking fuel oil spread cuts scrubber earnings premiums

Difference in price between 0.5% and 3.5% marine fuels now below $100 per tonne for first time.

News ID: 80486

Date: 04 March 2020 - 08:52

Change in fuel oil pricing structure is likely to extend payback times for scrubber technology, now deployed on over 2,700 trading vessels, according to data from Lloyd’s List Intelligence.

SCRUBBERS ARE INSTALLED ON SOME 16% OF THE GLOBAL CRUDE TANKER FLEET, AND 12% OF BULK CARRIERS AND BOXSHIPS, AS MEASURED BY DEADWEIGHT TONNAGE.

THE spread between high- and lower-sulphur marine fuel oil is contracting, which has slashed earnings premiums for scrubber-fitted vessels.

The difference in price between high- and lower-sulphur fuel oils has shrunk by two thirds in two months, falling below $100 per tonne in Singapore for the first time on March 2.

The price of 0.5% very low sulphur fuel oil in Singapore is now 37% below what it cost on January 1, reaching $393.25 per tonne on March 2, according to price reporting agency Argus Media. That compares with 3.5% fuel oil at $314 per tonne, down 6% over the same period.

The VLSFO physical price reflects free-falling demand for land and air transport fuels that has drastically shrunk the use of middle distillates, which include jet fuel, diesel and gasoil.

Many VLSFO blends are higher-sulphur fuel oils that are cut with now-cheaper marine gasoil to reduce their sulphur content.

Middle distillates are leading the oil complex lower as the coronavirus outbreak alongside the warmest winter on record removes at least 700,000 barrels per day in global demand from the market.

That is also reflected in low-sulphur gasoil futures trading on London’s ICE Futures Exchange, now 27% below their three-month high this week, compared to Brent crude, down 22%.

At the beginning of February, daily earnings for a scrubber-fitted aframax tanker on the Middle East Gulf to Asia route were $12,000 higher than a conventional tanker running on compliant, higher-cost fuel oil, according to calculations from London shipbroker Braemar ACM.

Last week the shipbroker calculated the same earnings premium much lower, with the difference now shrunk to a smaller, $7,300 daily.

The change in the fuel oil pricing structure is likely to extend payback times for the scrubber technology, now deployed on more than 2,700 trading vessels, according to Lloyd’s List Intelligence data.

Scrubbers are now installed on some 16% of the global crude tanker fleet, and 12% of bulk carriers and containerships, as measured by deadweight tonnage.

The sulphur abatement technology costs about $2.5m to retrofit.

When the price difference between 0.5% and 3.5% fuel oil was as high as $300 per tonne at the end of December, the payback period for a scrubber-fitted very large crude carrier was seen as short as six months.

The earnings premium for a suezmax tanker would see the investment recouped within 18 to 24 months at a spread of $200 per tonne, according to Norwegian investment bank Cleaves Securities.