Limited output, rising oil complex boosts VLSFO to record highs
4th February 2022 16:59 GMT

Very low sulfur oil has reached record highs at key bunker ports as rising costs of production limit output, adding to bullishness across the oil complex.

Desulfurization is an energy-intensive process and it is proving costly in the current environment of high gas prices, leading refiners to trim production of the bunker fuel.

This is adding an extra gear to the upward trajectory that crude oil and a range of petroleum products are already on. Concerns about potential sanctions on Russia in the event of war with Ukraine and other bullish factors are already supporting prices for key crude and product benchmarks.

The combined effect is record high prices of 0.5% sulfur fuel oil at key bunker ports, with particular acceleration starting in the last few weeks.

S&P Global Platts assessed delivered 0.5%S FO at the key European bunker hubs of Rotterdam and Gibraltar at $689/mt and $716/mt, respectively, Feb. 3. In both cases this was a record since the assessment started in 2019.

The acceleration picked up in mid January and since then the Rotterdam assessment has risen 16% and Gibraltar 15%.

By comparison, Platts assessed Dated Brent at $93.46/b Feb. 3, up 10% since Jan. 11.

Rising costs

High natural gas prices have led to extremely high desulfurization costs, which removes an incentive for refiners to produce lower sulfur molecules, one fuel oil trader said.

European gas prices remain at historic highs on continued winter supply concerns given curtailed Russian deliveries and relatively low storage stocks.

The TTF day-ahead price hit an all-time high of Eur182.78/MWh Dec. 21, 2021, an increase of 985% year on year, according to Platts price assessments. Though prices have eased since, they remain near historic highs.

There have been additional localized factors as well. For example, in the Eastern Mediterranean there is a shortage of imports. Poor weather in the Black Sea is disrupting exports at 0.5%S FO ports such as Russia’s Novorossiisk.


Soaring benchmarks


Adding to the costs of production is the price supportive oil benchmarks. "We’ve had five weeks of disruption left, right and center, now frost in Texas is threatening supply, and geopolitical risk is not going away. With both WTI and Brent crossing $90/b, the next big run number is $100/b," Ole Hansen, head of commodity strategy at Saxo Bank told Platts.

The prospect of sanctions in the event of a war on Ukraine’s border is one such geopolitical risk and this concern has percolated from crude down to other benchmarks such as European distillate ICE low sulfur gasoil futures benchmark, which is an important marker for 0.5%S FO.

The benchmark is a 10 ppm ultra low sulfur diesel contract for barges loading FOB ARA.

Europe relies heavily on diesel imports from Russia and ICE LSGO futures are heavily influenced by diesel markets. Russian barrels typically account for at least 56% of diesel imports to Europe, some months as high as 75% of imports, according to data from commodity firm Kpler.

Platts ,
4th February 2022 16:59 GMT