Marine fuel 0.5% futures lead 2020 price discovery and offer hedging against market uncertainty

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Despite the fact that the enforcement of the 0.5% sulfur cap will commence in less than a year, the situation around the pricing of the compliant low sulfur fuel has remained foggy so far. Since physical trading still remains almost inactive, there is no market liquidity and subsequently the $20-$40 premiums to High Sulfur Fuel which are reported by the relevant physical indexes do not appear to be indicative.

In the middle of such uncertainty, market participants can now utilise Information from the trading of fuel oil futures, which commenced recently, to take some form of feedback on how much the physical market of 0.5% fuel is expected to price.

The first trade on the new Singapore FOB Marine Fuel 0.5% (Platts) Futures was concluded about one month ago by FIS (Freight Investor Services) at a $200 differential to the 380 HSFO while it was then narrowed down to approximately $180/ton during February. On the other hand, the 0.5% Rotterdam Barges differential is trading at slightly lower levels; at approximately $170 per ton.

During the coming months of 2019, the 0.5% East-West and the various 0.5% fuel oil crack markets will also be introduced. With the use of East-West and crack, market players will be able to price the 0.5% fuel directly from the crude oil futures, which is more transparent than the current method of the difference to the HSFO. Furthermore, information on the trading of 0.5% fuel crack (which is the cost of turning a barrel of crude oil into compliant fuel) will add transparency on refiners’ costs to produce this grade, a parameter which also remains unclear.

FIS expects that now that the first futures trade has been published, more market players will enter the futures market and as a result liquidity will be increased, accuracy for the physical Platts index will be improved and market transparency will rise. Subsequently, FIS adds, the existing price spread between the physical and futures market is expected to close as we are moving towards the 1st January 2020.

As we are moving towards 2020, the bunkering market will definitely gain more transparency in regards with the pricing of 0.5% fuel, however there are still many obstacles to overcome before the physical 0.5% bunker market functions properly. Until this to happen, hedging using the new fuel oil futures listed on both CME and ICE can add security on the market risks from price uncertainties and fluctuations that buyers may face due to the IMO 2020 regulation.

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