LSMGO premium over VLSFO narrows in Singapore

The premium of low-sulphur marine gasoil (LSMGO) over very-low sulphur fuel oil (VLSFO) in Singapore has averaged $6.58/t so far this month, down from as high as $55/t in July this year.

This follows ample middle distillates available in the wake of the Covid-19 pandemic, which has cut demand for travel. Argus yesterday assessed delivered LSMGO and VLSFO bunkers in Singapore at $327.25/t and $323.71/t respectively.

LSMGO usually commands a premium over VLSFO as it has a higher calorific value and a lower maximum sulphur content. But it can also sell at a discount, as it did during the final quarter of 2019 to this year's first quarter and again in April this year, as shipowners typically prefer the properties of VLSFO as their main engine fuel.

LSMGO has a 0.1pc maximum sulphur content and a viscosity of 2-6 centistoke (cst) compared with VLSFO that has a maximum sulphur content of 0.5pc and a viscosity of up to 380cst. Although both fuels are compatible with International Maritime Organisation 2020 caps on sulphur and are now almost at price parity, most shipowners prefer the higher viscosity of VLSFO.

The lower gasoil viscosity can lead to stability issues, which can be an issue especially for longer, intercontinental journeys.

"Most diesel engines require fuel with a minimum of 12cst, so substituting fuel oil with gasoil could be an operational concern", according to one supplier.

"Although it is technically possible to burn gasoil instead of fuel oil, this is largely dependent on the ship's engine and the chief engineers' comfort levels, and requires crew training and lots of technical arrangements", according to a market participant.

Tanker vessels are generally more comfortable with using either fuel and are more price sensitive, while dry bulk vessels are more conservative as they often lack a more sophisticated understanding of fuel management. "Our vessels in the US ECAs have been using gasoil for a long time without issues", said one buyer.

This contrasts with the dry bulk segment of the market, "where technical teams are much less advanced and the handling of different fuels is less well understood", according to another buyer.

"We do have some requests from buyers for either gasoil or fuel oil, but that is only a limited fraction of the market and usually results from VLSFO supply issues", according to a trader.

Some buyers consider opting for gasoil rather than fuel oil especially when it comes to smaller cargoes. "A stem below 500t of VLSFO will incur a barging fee, while that is not the case for gasoil", said a trader.

By Sammy Six