Singapore scrubber spread hits new low on HSFO strength

The discount of high-sulphur fuel oil (HSFO) to very low-sulphur fuel oil (VLSFO) bunkers in Singapore has moved to the narrowest level on record over the past week because of tight HSFO cargo supplies and weak demand for VLSFO.

The VLSFO-HSFO spread, also known as the "scrubber spread", fell to a record low of $44.21/t on 29 October. The spread reached a record high of $370.50/t on 2 January as the market adjusted to the International Maritime Organization (IMO) sulphur cap and VLSFO supply tightened, but fell sharply as the Covid-19 pandemic emerged. The spread has averaged $65.21/t over the past six months.

"Availability of HSFO remains scarce and this lack of liquidity seems to be driving the narrowing of the spread, as storage and barging costs rise for HSFO", one broker said.

HSFO cargo supplies have been tightening as refineries cut runs to accommodate weak demand for jet fuel, which has also curtailed production of residual fuels. There is also strong demand for HSFO in Pakistan, Bangladesh and Saudi Arabia, where it is used in power generation.

More HSFO cargoes have also been exported from Singapore to China to meet an increase in Chinese demand as more retrofitted vessels come on the market.

Logistics and supply of HSFO in Singapore is concentrated among just a few market participants, which is also supporting premiums.

The strength in HSFO markets comes as supplies of VLSFO have also been tight, even as demand for the lower-sulphur fuel remains weak. Container lines are the main bright spot, but they are also the ones that have been most active in installing scrubbers.

The narrow high-low sulphur spread is bad news for shipowners that have installed scrubbers as part of their IMO 2020 strategy. "With the scrubber spread now below $50/t, the payback period of our investments has increased to four-five years", one buyer said.

By Sammy Six