KPI OceanConnect: Betting on bigger

Very low sulphur fuel oil (VLSFO) prices stood at all-time highs this time last year, and it briefly seemed that IMO 2020 might have enduringly created large HSFO-VLSFO spreads. In addition, rumours about quality management, fuel incompatibility, and adequate availability – mainly concerning low sulphur blends – frequently unsettled the market during those first two months.

As you’d expect, the economic shock created by Covid-19 was the dominant theme in 2020. However, its effects have been substantially varied in different bunkering hubs. For example, although Panama has seen VLSFO sales increase since October 2020, it hasn’t yet reached pre-pandemic levels in January 2020. On the other hand, Singapore remains the world’s top bunkering port with sales amounting to just under 50 million tonnes in 2020 - its biggest gain in the last four years.  

What to expect in 2021 and beyond

When IMO 2020 was first implemented, there were concerns that some regions wouldn’t have the capacity to supply enough distillate fuels to meet both domestic and maritime demand. Instead, there’s been plenty of compliant fuels, as many of the usual major consumers of distillates suffered huge demand falls due to Covid-19.

Within OPEC+ there’s no reliable consensus over oil production, and as a result, latent supply is likely to exceed actual demand for some time to come. Additionally, numerous major oil producers, such as Venezuela, Iran, and Libya, remain functionally offline. Although some agreements have now been made to rein in on oil production – including Saudi Arabia’s planned 1million bpd cut – we’re unlikely to see three-figure Brent prices again soon.

Nevertheless, it’s important for the industry to now prepare for some of the risks highlighted back in 2019, which may surface in the coming months.

Although the severest predictions from those early weeks in 2020 are unlikely to come to pass, there will be consequences if oil prices climb. A number of financial institutions have already predicted this, and with the huge volatility in bunker prices last year, we’re already seeing prices gradually rise. VLSFO, for example, dropped to $150 per tonne in May 2020, but has since risen to the $300s and continues to increase.

While there have been fewer quality issues than many analysts predicted, this may have been partly masked by the pandemic and the depressed oil price. These challenges may rear their head once the world starts to recover from Covid-19, distillate demand increases in other industries, and there is a risk that unscrupulous players in the industry start using cheaper components for blending. This we have seen in the past and I am sure that we will face similar cases either regionally or even worldwide. 

Driving decarbonisation with consolidation

The shipping industry is being presented with multiple pathways towards decarbonisation – all of which have unique challenges. As we’ve seen with the introduction of LNG in the last decade, for example, there’s often a chicken or egg issue for new marine fuels.

What we do know is that over the next few decades, the marine energy supply chain will transform immensely. With this growing shift towards future fuels and alternative sources, KPI OceanConnect is well positioned to guide our partners through the challenges and committed to providing the industry with the energy it needs to run its fleets sustainably.

The transition won’t be a walk in the park. Last year we saw the higher costs of the new VLSFO blends, resulting in smaller firms’ credit lines often struggling to cope. Many within our industry predicted that IMO 2020 would drive a wave of consolidation. We saw the start of that in 2020, notably with the merger of KPI Bridge Oil and OceanConnect Marine, and there continues to be no shortage of M&A rumours.

At a structural level, the industry has also seen a decline in capital availability for all but the strongest players. Primarily this is due to many large banks, such as ABN AMRO, BNP Paribas, and more recently Rabobank, pulling out of commodity trade finance altogether. This has created additional costs and liquidity and transaction complexities for shipowners, as well as bunkering companies. 

The view to 2030

The role of traders is perfectly placed here to help facilitate the energy transition. A major part of that will be through the benefits provided by scale. Partnering with a larger, well-funded trading firm will not only give you access to the latest market data, availability and expertise, but also provide advanced credit and risk solutions. In fact, the benefits gained by scale was a key consideration in our merger, and it’ll no doubt be the same for future acquisitions too.

As traders, we provide not only fuels but also solutions and intelligence, and we have a responsibility to help guide our partners through the transition to sustainable shipping and all associated challenges along the way. We are closely following the development of different fuels, and fully expect our bunker sales mix to be very different in 2031.

Article original published by Bunkerspot on January 25, 2021