HSFO demand seen rising as Hi-5 spread widens further

Quantum Commodity Intelligence – Demand for high sulfur fuel oil will likely remain strong this year as the economic incentive for shipowners to install scrubbers increases, amid rising distillate prices and demand from non-scrubbed ships.

The spread between high sulfur fuel oil (HSFO) 380cst, 3.5% sulfur fuel and marine fuel 0.5% has widened to the highest in more than a year this week, according to Quantum data, with the so-called Hi-5 spread averaging $126/mt this month so far.

That spread has been widening since April when Quantum assessed the differential at $112/mt, then $113/mt in May and $118/mt in June.

Such a price dynamic is leading to an increase in HSFO demand as ships with scrubbing technology are at an advantage.

Analyst group Drewry has estimated the cost of fitting an open loop scrubber in a new build very large crude carrier at between $2.5 and $3 million.

That equates to a payback time for scrubber installation of about three years based on a $100/mt spread between the two grades.

"As price spreads between the two grades have widened this year, Asian imports of HSFO have risen once again; more exhaust scrubbers are being fitted to vessels to enable shipowners to take advantage of the improved economics of HSFO consumption, avoiding the more expensive lower sulphur grade," ship-tracking company Kpler said in a research note Friday.

Kpler said the number of ships fitted with scrubbers reached 4,355 by January this year, a sixfold increase in two years.

S&P Global Platts estimates that figure will rise to 7,597 by the end of the decade.

The rise in adoption of the technology to take advantage of favourable margins has seen HSFO imports to Asian countries rise to 6.6 million mt in the first six months of the year.

That is almost a 50% rise on 2020 levels, and an 8% increase on similar 2019 figures, which is a better benchmarking year due to the rise in Covid-19 and as it was the last year before new regulations limiting sulfur emissions took effect.

Demand for fuels in the oil-based bunker market is expected to rise by around 14% to 6 million bpd by 2030, according to S&P Global Platts, with HSFO accounting for around 30% of total supply – equivalent to 1.83 million bpd and a near doubling of current levels.

However, HSFO demand is unlikely to ever recover to the 3 million bpd consumption figure seen just two years ago.