Home / Bunker fuel price drop brings relief

Bunker fuel price drop brings relief

The bunker fuel market appears to have finally levelled out, and the general consensus in the sea freight business is that prices have settled down to an acceptable level.

The bunker fuel market appears to have finally levelled out, and the general consensus in the sea freight business is that prices have settled down to an acceptable level. Production cuts agreed by OPEC cartel members took effect in October, and as yet have had no detrimental impact on prices.

As SFME went to press, US crude finished down two cents at US$58.71 a barrel, and London’s Brent lost five cents falling to $58.98. The July high topped out at $78 and had a devastating impact on shippers who had not bought ahead. Average revenue per TEU took a dive, and many firms were left facing disappointing quarterly returns and poor annual figures.

The spike in oil prices this summer drove margins for shippers to a dismal level. However, a long-awaited reprieve finally seems to have arrived. Global oil prices have fallen 20% since hitting the summer high, and the resumption of normal profitability is on the horizon for most carriers.

Despite these falls, fuel prices are still high compared with recent years. Fujairah bunker prices increased from an average $195 per tonne in 2004 to $258 in 2005 and to date, $318 in 2006. Fred Doll, Managing Director of Doll Shipping Consultancy, notes that, “A $60 per tonne bunker fuel cost increase for a typical 4400 TEU Panamax container ship increases costs by about $3 million per ship per year.”

The Fujairah price index has dipped to $277 per metric tonne and production cuts intended to shore up prices, led by Saudi Arabia, appear not to have had a significant impact. There is confidence in the market that the announced cuts by OPEC will not be strictly adhered to by all members.

However, the bad news is that Saudi Arabia has expressed concern that the action has not had the desired effect of shoring-up the market, and will be cutting production further still in December. Middle Eastern producers are not alone in feeling uneasy in light of the current drop in price levels. Rafael Ramirez, Venezuela’s oil minister, has stated that his government will follow suit to increase revenues.

Although the possibility of a winter price spike exists should cold weather and high demand cut into supplies, Doll is generally optimistic for 2007.“Bunker prices track crude prices closely, and recent Fujairah prices are about right compared to the crude oil price. Forecast growth in OPEC and non-OPEC crude supplies is greater than forecast demand growth,’’ he says. ‘‘Some members of OPEC know that too high an oil price hurts them in the long run. If they prevail, crude prices should remain below the 2006 peaks,” Doll explains.

There is, of course, no certainty that the OPEC production cuts that we’re seeing now will actually have the intended effect, especially considering that market focus is currently centred on spare capacity rather than absolute OPEC volumes.

The oil price has been running at a very high level partly because of a fear of supply dislocations, however the oil has continued to be delivered and now stocks around the world are looking relatively healthy. Indeed the October IEA report claims: ‘‘The stock picture heading into the winter months, appears better than it has for several years.’’

This view is echoed by Neal Bolton of oceanconnect.com, global energy and risk management analysts: ‘‘There is plenty of oil around at the moment. I think it’s unlikely that we’ll see it go over $300 per metric tonne for the rest of the year.’’

The view expressed by the majority of professionals throughout the oil and shipping related industries, seems to be that the storm has been weathered, and relief really is in sight for the sea freight business.

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