Residual fuel oil has a couple of uses, predominantly consumed as bunker fuel in the maritime shipping sector. Consumption in December 2021 was at its most elevated end-of-year level since 2012, as stated by Weekly Petroleum Status Report (WPSR).
On January 1, 2020, tighter regulations from the International Maritime Organization (IMO) on maritime fuel sulfur specifications became practical. Before 2020, marine fuel could have a sulfur content as high as 3.5%, which is believed high-sulfur fuel oil. The IMO now directs ships to switch to fuels with a 0.5% sulfur content or less, forcing ships to use a more processed and more expensive variety of residual fuel oil named very-low-sulfur fuel oil.
Ships concede with the IMO specification as long as their actual emissions meet the target sulfur emissions level, regardless of the specification of the fuel they use. Shipowners can install sulfur scrubbers onboard to decrease sulfur emissions while consuming high-sulfur fuel oil and remaining compliant. Ship scrubbers are costly and require constant maintenance. Nonetheless, vessels can lower operating costs by buying high-sulfur fuel oil instead of higher-priced very-low-sulfur fuel oil or low-sulfur marine gas oil.
The IMO regulation involves global shipping
Marine vessels working within the North American or U.S. Caribbean Sea Emission Control Areas (ECA) were previously required to meet 0.1% sulfur content while operating within those waters.
Since spring 2020, the general production of residual fuel oil has decreased because of substantially smaller refinery production resulting from the effects of the coronavirus epidemic.
High crude oil prices indirectly contribute to higher overall bunker fuel prices. Higher prices provide ship owners more substantial incentives to install scrubbers to take advantage of the price value of 3.5% high-sulfur fuel oil to 0.5% very-low-sulfur fuel oil.
The increase in residual fuel oil demand arrives with record gains in maritime shipping volumes and rising high-sulfur fuel oil prices in Singapore. The Singapore market is an international benchmark for marine shipping. Since the start of November 2021, Singapore’s very-low-sulfur fuel oil price premium over high-sulfur fuel oil increased to higher than $20 per barrel (b). It closed for $30/b between December 2021 and January 2022.