A significant number of ship owners and bunker players are adopting a wait-and-see attitude on the new low-sulfur bunker mandated by IMO 2020 regulation so far.

The potential issue with low-sulfur bunker is that no one is currently blending it. The market, including suppliers, blenders and buyers, are trying their best to guess the economics of producing and using the new marine fuel ahead of the Jan. 1 implementation date. Also, some ship owners are concerned about the stability, logistics and compatibility issues of the low-sulfur bunker and the potential impact on the ship engines.

Some bunker players who spoke with OPIS expected a significant percentage of the global shipping market to play it safe by temporarily using low-sulfur 0.5% marine gasoil (LSMGO) at least at the beginning of 2020 to meet the IMO 2020 mandate for all ships to switch to 0.5% sulfur bunker from 3.5% marine fuel.

Alternatively, scrubbers could be another solution.

This is even though LSMGO, which is basically 0.5% sulfur gasoil, would be more expensive than low-sulfur bunker. LSMGO is now priced at $220/ton higher than 3.5% sulfur bunker (high-sulfur bunker), and this price spread is expected to widen significantly as the Jan. 1 mandate looms.

The current loose estimate for low-sulfur bunker price is at about $200/ton, but this may change as the market moves closer to the deadline at the end of next year.

The reason to go with LSMGO as a safety precaution is because LSMGO is a fungible product, which is essentially gasoil, but with low-sulfur bunker, it remains to be seen if it would be a fungible product. Some players had already expressed concerns about fungibility of low-sulfur bunker as some major oil companies are expected to dictate a no-comingling rule to uphold their fuel warranties.

A no-comingling rule for branded low-sulfur bunker would mean a ship would have to buy the same branded bunker fuel at the next port of call, but it is noted that the same branded fuel may not be available at all ports of call around the world. If the branded fuel is comingled with another brand or unbranded product, all branded fuel warranties would be voided.

To avoid potential fuel logistics issues resulting from branded supplies, some ship owners and bunker players are expected to turn to LSMGO as the go-to fuel in early 2020. This early market assessment may change a year from now if more clarity on price economics for different competing fuels, new fuel fungibility and fuel stability emerge before 2020.

The other alternative to low-sulfur bunker is to install scrubbers onboard the ships.

However, this may come with a risk as well. Scrubbers require an upfront investment from ship owners, who would be essentially betting on a sharp price discount for high-sulfur bunker. The current estimate for scrubber adoption for the global ship fleet is about 10%, mostly focused on the larger vessels.

Besides upfront investments, there is also an economic risk associated with scrubbers. Ship owners who signed up for scrubber installations for their large ships are betting on a significantly lower price for high-sulfur bunker as the market switches to the new low-sulfur grade.

While the price spread between low-sulfur and high-sulfur fuel oil is expected to blow out due to the fuel regulation change in 2020, it remains unknown how low would high-sulfur bunker prices go in relation to low-sulfur material.

"We think the widening of that price spread may not be as wide as some people expect it to be," a source said.

The future prices of low-sulfur bunker, LSMGO and high-sulfur bunker will be correlated and would depend on the price spread between low-sulfur and high-sulfur fuel oil in 2020. This in turn would offer clarity to ship owners on which fuel to use. Bunker suppliers will make and sell the fuel that is in demand.

--Edgar Ang, eang@opisnet.com

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