Tightness in the European fuel oil markets will persist into Q1 2022, as high prompt demand looks set to weigh on availability.
The 0.5%S marine fuel forward curve is currently showing a sharp price drop between January and February 2022 to give a $6.5 backwardated structure. This structure is maintained further down the curve, with a $4.75/mt backwardation between February and March and refineries will be seeking to capitalize on this high prompt demand.
“You have [the] Sines [refinery] still out, and some of the refineries in NWE only recently started producing [VLSFO] again,” commented one trader. “I think all of those [refineries] that can produce it are doing so,” the source added.
Additionally, increased fuel oil demand in Europe may add further tightness to the complex. Sweden has started up a back-up oil-fired power plant to help ease an electricity shortage in nearby Poland in December through February. An unplanned outage from Norway’s Troll field, the halt of a major pipeline delivering Algerian gas to Spain and an uncertain outlook for Russian gas supplies will reduce LNG supplies, which potentially leaves room for greater fuel oil demand, according to Platts Analytics,
However, the ongoing uncertainty around the emerging omicron variant is making sources hesitant to declare a bull market for marine fuel. Marine fuel entered 2021 as the most profitable transport fuel due to refinery run cuts for gasoline and jet fuel. Entering 2022, 0.5%S lags both products.
HSFO back in the spotlight
The implementation of the IMO 2020 sulfur cap led to speculation about the future of high sulfur fuel oil as a bunker fuel. However, the widening differential between 0.5%S and 3.5%S fuel oils – known as the Hi-5 spread – is incentivizing shipowners to install scrubbing installations, which allow ships to burn cheaper HSFO instead of LSFO. The Hi-5 spread has averaged $132/mt over November, compared with an average of $90/mt in January.
Platts Analytics expects scrubbers to be fitted on 21% of ships in 2023, rising to 28% in 2030. Despite concerns about the future availability of HSFO as a marine fuel, it is evident it is not going anywhere in the short-term. In bunker markets, HSFO saw significant strength in 2021, with prices their highest since October 2014. Considering the increased uptake of scrubbers on ships, and the significant expense to do so, shipowners lack an incentive to abandon high sulfur as a source of bunker fuel in 2022.
However, one area where analysts predict HSFO could weaken is in the uptake of bio-fuels. This is ahead of IMO 2030 regulations, whereby the shipping industry must reduce its total carbon emissions by 40% by 2030. In 2021, we have already seen an increase in the use of bio-fuels, with many shipping companies experimenting with and investing in alternative fuel sources.
Additionally, record-high LNG prices in 2021 prompted many Asian utility companies to turn to HSFO as an alternative for power generation. European HSFO exports to Asia in November totaled 1,091,000 mt – the largest amount since March, according to Kpler shipping data.
“I’m expecting the same [strong HSFO demand] so far. I think summer might create some stress over power demand and there not being enough barrels of fuel oil in the Arabian Gulf, Bangladesh and Pakistan,”, said a fuel oil trader, adding the high LNG prices would likely continue to create a bid for HSFO in Asia in 2022.
Refinery costs continue to rise
Surging natural gas prices have also pushed up power and hydrogen costs for refineries. Less integrated refineries, like those found in the Mediterranean, are more exposed to volatile gas prices, and those refineries have already started to reduce run rates in the face of high gas prices.
“Looking ahead into Q1 2022, European vacuum gasoil seems to be weaker. Natural gas is just too expensive right now”, said one European feedstock trader. “People are even thinking about shutting down DHCs [Distillate Hydrocrackers] altogether,” added a second feedstock trader. Hydrogen is used in secondary units like DHCs to produce clean products such as diesel out of VGO, therefore natural gas and hydrogen prices can have an impact on VGO demand.
Platts Analytics expects higher potential for run cuts for Mediterranean refiners that are “unable to hedge exposure to high natural gas prices” while runs in Northwest Europe are expected to improve in Q1 2022 on 2021 but will remain below 2019. “We expect runs to reach 1Q20 levels starting only in 2Q22,” Platts Analytics said.
S&P Global Platts assessed the Dutch TTF day-ahead contract — a key benchmark for European gas prices — at Eur182.78/MWh ($206.51/MWh) Dec.21, a new all-time high. Prices are still significantly elevated from a year ago, when the benchmark was assessed at Eur16.85/MWh for the same date.