Cheap Gasoil Has an Edge Over Expensive VLSFO Ahead of 2020 Switch

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According to a Reuters report, when new global rules limiting the amount of sulfur in shipping fuels were announced, marine gasoil (MGO), a type of diesel fuel used on ships, was declared the early winner since most types readily met the new 0.5% limit on sulfur content.

MGO Swing Not As Expected?

But with only about 100 days before the International Maritime Organization’s (IMO) rules start, analysts and traders agree that the scale of the MGO demand swing will not be as great as expected.

Instead, very-low sulfur fuel oil (VLSFO) has emerged as a dark horse to challenge MGO as a replacement for high-sulfur fuel oil, with a 3.5% sulfur limit, once the switch begins in 2020.

  • VLSFO for sale in October in Singapore, the world’s biggest ship fuelling port, is currently indicated at $465.25 a ton, according to data from brokers Starfuels. That compares to MGO at $556 a ton in the city-state, according to ClearLynx.
  • With the supply of VLSFO set to jump, shipowners are expected to lean toward the lower cost option.
  • At stake is which type of fuel will replace the 3.6 million barrels per day (bpd) of HSFO, the shipping industry currently consumes.

VLSFO Adoption Expected?

“In Europe and Singapore we’ve been successfully producing batches of VLSFO and we’ve been working hard with our customers to test those and try them. The feedback has been positive,” Sharon Weintraub, the Chief Executive Officer for Supply and Trading, Eastern Hemisphere, at BP Plc told Reuters.

“We expect most people will look to migrate to VLSFO. However, there will be a proportion of more conservative customers who are looking to use MGO.”

VLSFO Concerns Lifted With Testing

The global shipping industry was initially skeptical about the quality of VLSFO, but as 2020 approaches market participants agree there is growing confidence in VLSFO.

“The concern about quality is not as great as it used to be. It’s being tested left, right and center. Most of the fuels available are stable, fit for use, and in general of good quality,” Lars Malmbratt, General Manager for Bunker Procurement at Swedish shipping company Stena Bulk said on Tuesday on the sidelines of an industry conference in Singapore.

VLSFO Accessibility Uncertainty

MGO’s established accessibility at ports bolstered expectations for its dominance while there were doubts about how well supplied low sulfur fuel oil variants could be.

“The closer we get to 2020, the more it seems there will be more low sulfur fuel oil than people previously thought,” said Matt Stanley, an oil broker at StarFuels in Dubai.

 

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Source: Reuters

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