Ship-Fuel Prices Seen at Record High on Crimped Supply

The price of marine fuel, which makes up 70 percent of tanker transportation costs, will reach a record high this year as export cuts crimp supplies, said McQuilling Services LLC.

Fuel will cost $690 a metric ton on average, 2.7 percent higher than last year’s $672, the Garden City, New York-based tanker adviser said in an e-mailed report. The fuel, known as bunkers in the industry, will keep climbing to $760 a ton by 2017, McQuilling forecast. Costs more than quadrupled in the past 10 years, it said.

Fuel represents 70 percent of transportation costs for tankers, surging from an average 24 percent over 20 years until 2008 because of higher prices, the investment-banking unit of DNB ASA, the largest Norwegian bank, said in an August report. The global merchant fleet uses more than 370 million tons of fuel each year, according to Freight Investor Services Ltd., a London-based freight-derivatives broker.

“Bunker prices will rise slowly over the next three years,” McQuilling said, with reduced exports from Iran and Russia squeezing supply. At the same time, more refineries are investing in so-called cokers that convert leftover residual oil used to power ships into lighter products such as naphtha or heating oil to boost yields, the report showed.

Higher prices encouraged ships to reduce speeds with the aim of saving fuel and boosting earnings, effectively reducing vessel supply because more time is needed to complete a journey. Tanker charters for single voyages to ship crude or refined oil products are based on Worldscale rates, an industry formula that includes fuel costs. Dollar-a-day rates to charter commodity ships that haul minerals and grain exclude fuel, which is paid for on top of the hire.

Very large crude carriers carrying 2 million-barrel cargoes of oil cut $8,542 off their daily fuel costs by slowing to 13 knots, according to DNB Markets. Each 10 percent reduction in speed reduces fuel requirements by about 30 percent, according to the bank. A VLCC proceeding at 15.9 knots uses as much as 92 tons of fuel a day, it said.

(Corrects first two paragraphs of story originally published Feb. 11 to show McQuilling predicted higher fuel prices this year.)
Before it's here, it's on the Bloomberg Terminal.