Bunker Fuel: Low Crude And Soft Trade To Keep Prices Weak

BMI View: IFO and MGO prices will remain weak over H116 as the crude oil market struggles with oversupply. High bunker fuel stock levels and struggling inter-regional trade will limit the strength of price recovery over the next five years.

Short-Term Outlook (three-to-six months)

Due to continued weakness in global oil prices, we have revised down our intermediate fuel oil (IFO) 180 forecast for 2016. We forecast the IFO 180 price across New York, Rotterdam and Singapore to jointly average USD278.5/mt in 2016, down from our previous forecast of USD348.5/mt.

Price Divergence To Remain
New York, Rotterdam & Singapore IFO 180 Spot (USD/mt)
Source: Bloomberg

Bunker Fuel: Low Crude And Soft Trade To Keep Prices Weak

BMI View: IFO and MGO prices will remain weak over H116 as the crude oil market struggles with oversupply. High bunker fuel stock levels and struggling inter-regional trade will limit the strength of price recovery over the next five years.

BMI Bunker Fuel (IFO180 & MGO) Price Forecasts
2015 2016f 2017f 2018f 2019f 2020f
Note: IFO price reference taken from LQM Petroleum Price and Bloomberg Bunker Index. MGO price reference taken from Oceanconnect Houston, Rotterdam & Singapore. f = BMI forecast. Source: Bloomberg, BMI. Last updated: January 13 2016
Rotterdam IFO 180 (USD/bbl) 50.69 41.15 47.00 48.00 51.00 55.00
Singapore IFO 180 (USD/bbl) 45.60 36.15 43.00 45.00 50.00 56.00
New York IFO 180 (USD/bbl) 61.00 47.40 55.00 54.50 56.00 58.00
Average IFO 180 (USD/bbl) 52.43 41.57 49.00 50.67 53.83 59.5
Average MGO (USD/bbl) 67.70 47.75 57.00 59.50 65.00 72.00
Rotterdam IFO 180 (USD/mt) 339.60 275.71 314.90 321.60 341.70 368.50
Singapore IFO 180 (USD/mt) 305.50 242.21 288.10 301.50 335.00 375.20
New York IFO 180 (USD/mt) 408.73 317.58 368.50 365.15 375.20 388.60
Average IFO 180 (USD/mt) 351.28 278.50 328.30 339.47 360.68 398.65
Average MGO (USD/mt) 507.75 358.13 427.50 446.25 487.50 540.00

Short-Term Outlook (three-to-six months)

Due to continued weakness in global oil prices, we have revised down our intermediate fuel oil (IFO) 180 forecast for 2016. We forecast the IFO 180 price across New York, Rotterdam and Singapore to jointly average USD278.5/mt in 2016, down from our previous forecast of USD348.5/mt.

Bunker fuel prices will be kept low over H116 due to the persistent oversupply in the crude oil market, limiting upside to refining feedstock prices. We expect Singapore IFO 180 to continue trading at a discount to New York and Rotterdam prices, as Asia adjusts to the turbulence triggered by the rebalancing of the Chinese economy. We also forecast the premium in New York prices will reduce from current levels given growing uncertainty surrounding US economic growth.

Price Divergence To Remain
New York, Rotterdam & Singapore IFO 180 Spot (USD/mt)
Source: Bloomberg

Overcapacity in the freight and dry bulk sectors will continue to drive slow steaming and idling, resulting in lower and more efficient fuel consumption across the shipping sector. Also larger and more fuel efficient container and dry bulk ships will continue to improve overall efficiency in the shipping fleet.

Slower Speeds Drive Greater Fuel Efficiency
Average Speed - All Vessels (knots)
Source: Bloomberg

We are increasingly bearish on marine gasoil (MGO) prices, which are more closely correlated with land-transport fuels. A growing glut of gasoil at major storage hubs will put greater pressure on MGO prices over H116. We forecast the combined average of the Houston, Singapore, Rotterdam MGO price to come in at USD358.1/mt in 2016.

Long-Term Outlook

Global Bunker Fuels Availability To Grow

Overcapacity in the refining sector and stricter fuels standards in Europe, North America and developed Asia over recent years have driven investment into deeper refining complexity. This has resulted in greater low-sulphur fuel production which will increase its availability over the next five years, capping any recovery in MGO prices. This will be particularly apparent in Asia, where weaker demand for distillate fuel will overflow into international markets.

Distillate Oversupply To Worsen To 2020
Distillate Fuel Supply & Demand Balance Forecast - Global (LHC) & Regional (RHC), 000b/d
f = BMI forecast. Source: BMI

Similarly, high refinery throughput is expected to continue in 2016 given low crude prices and strong gasoline demand. This will sustain high stock levels of bunker fuels, weighing on IFO prices. We are expecting slower economic growth in many of the emerging markets that had supported shipping fuel demand over recent years ( see 'September 2015 - Global Growth Weak As EM Squeezed From All Sides', September 18 2015). Strong stock levels and softer than anticipated demand will maintain weak shipping fuel prices for at least the coming two to three years.

Efficient Fleet Use To Limit Fuels Demand

Overcapacity in the shipping fleet will continue to limit fuel demand over the coming years as ships are idled and slow-steaming continues. We also expect greater intra-regional trade to shorten shipping routes, particularly in Asia. Over longer routes, larger ships utilising economies of scale will increasingly reduce tonne mileage, decreasing the overall fleet usage.

Shipping Capacity Outgrowing Trade Demand
Container & Bulk Carriers In Service (DWT)
Source: Bloomberg

These trends will optimise the use of in-service vessels, resulting in more efficient use of fuel in the shipping sector as vessels travel at slower speeds to maximise utilisation. Given our outlook for sluggish global economic growth of barely over 3% for the coming five years, we see limited upside to trade growth. Scrapping will need to be substantially increased to balance the oversupply of shipping capacity.

Risks To Outlook

  • Higher Crude Oil Prices: Stronger crude prices than forecast will pull up marine fuel costs as higher feedstock prices filter through, presenting upside to our IFO and MGO price forecasts.

  • Improved Economic Growth: Our weak outlook for the shipping industry is based on our expectations for slower growth in key areas, particularly China. However, should global economic growth surprise to the upside, this could boost shipping demand and marine fuel consumption.

  • Greater Implementation Of Energy Efficiency Technology: The application of new technologies to maximise the efficiency of propellers, rudders and on-board energy systems, as well as more efficient ship design, will have a longer-term impact on lowering fuel demand.

  • Proliferation Of LNG As A Shipping Fuel: The use of LNG in shipping will increase in the coming years, displacing oil-based fuel. Uptake will be limited and likely restricted to areas with sufficient bunkering capabilities, though this will be limited to regions utilising smaller ships.

  • Improved Scrubber Capability: If scrubbing technologies can become lower-cost and more effective, demand for lower-cost IFO fuel could strengthen. New scrubbing systems designed into vessels present upside risk to this view.

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