Shipowners rush to bunker hedging

Shipowners rush to bunker hedging

By Ishaan Hemnani, co-founder, BunkerEx Limited

Innovation is touching every corner of the shipping industry, with major changes underway in the way owners are buying bunkers.

Rising oil volatility has caused an increasing number of shipping companies to start procuring their fuel months in advance. The easing of oil contango has also brought future prices in line (and even temporarily cheaper) than spot prices.

To capture this rising demand, new platforms have emerged to make bunker hedging faster and easier than buying on the spot market.

Oil volatility since 2010

“Spot purchasing has always worked for us, so why change it?”

Whilst bunker hedging is gaining in popularity, it is largely skewed towards larger owners. Should small-midsized shipping companies be taking advantage too? What’s in it for them?

To answer, we examined the Pros and Cons of bunker hedging.

PRO I: Fix stems with vessel “TBN”

Forward bunkers can be fixed without giving a vessel name. With no vessel nominated, owners retain the flexibility to lift their forward bunker volume on any vessel. This is extremely helpful for:

(i) operators who book cargo in advance, but wait to fix the ship on the spot market.

(ii) owners unsure of where their vessels will be trading, so want to keep the option to lift the fuel across their entire fleet.

Ultimately, vessel nominations are only required 10 days before bunkering to give buyers plenty of optionality.

PRO II: A wide, moving laycan

Bunker suppliers typically allow date ranges of 10 days (e.g. 15-25 December). But because derivatives trade by month, physical hedged bunkers always offer full month lifting dates (e.g. 1-31 December).

This means vessels that are early or late have no risk of delays or supplier penalties.

If the vessel slips by over a month – or the owner prefers to lift spot bunkers now and the hedged bunkers later – the laycan can easily be changed to the next month (from Dec to Jan, Jan to Feb, Feb to Mar and so on…).

Is this expensive to do? The average cost of moving volume to the next month is just 0.50c/mt (data from the last 10 years).

This cost is added to the fixed price and paid directly to the supplier 30 days after delivery.

In a backwardated market, it can actually be advantageous to lift the fuel later, getting a discount to the fixed price with every roll forward.

“Ultimately, even after fixing an owner can lift the fuel on a different vessel, on different dates, at a different port and different quantity without any penalties or extra costs.”

PRO III: Change port with NO cancellation fees

Booked for Singapore, but now need to lift at Zhoushan? Prior to vessel nomination, fixed bunker volumes can be moved to, well… any other port in the world.

How is this possible?

Because oil futures trade in regions, not ports. This means there is only one VLSFO future used to hedge the whole Asian region. The same is true for EMEA and the US, so owners are not locked into one specific port.

Charterers given various discharge port options use this flexibility regularly as vessels can receive fresh instructions at any time. If the new bunker port is cheaper than the original, that discount will actually be refunded back to the buyer.

Download worked examples of our Fixed Forward Price Flexibility.

PRO IV: Choose the safest supplier at the time of booking

Buying from one specific physical supplier months in advance can be precarious. On the date of nomination, that supplier may have had a recent bout of quality claims or rumours circulating of financial risk.

In bunker hedging, the physical supplier is not fixed until the vessel is close-by (though always mindful of avails). Keeping flexibility on which supplier to choose until the time of nomination can de-risk bunker buyers from unwanted quality claims and counterparty risk.

PRO V: After-hours trading

Ever notice that some suppliers will increase the price when the market is rising, but don’t decrease the price when its falling?

Hedged bunkers are tied to oil futures. These move up and down every second, with transparent screens and charts showing you every tick.

BunkerEx trading screen where clients can view live physical delivered bunker prices that tick every second

Oil futures trade continuously 22 hours per day so buyers can take advantage of after-hours dips in the market. If there was a sudden ‘flash crash’ in oil, where prices collapse below an owner’s targets for a rare few minutes, buyers can quickly execute.

PRO VI: Fast, easy execution

Paper markets are extremely liquid. By using this as the basis for physical prices, new technology has made the physical bunker market extremely liquid too.

High liquidity means prices can be executed lightning fast. See a price you like? Done. In seconds.

Gone are the days of chasing suppliers, waiting for refreshed quotes and re-checking avails. Prices on the forward market are always firm and ready to trade.

PRO VII: Certainty of your voyage costs

The main reason to hedge: certainty of fuel costs. The time lag between fixing a ship and stemming bunkers is pure oil price risk, which can go badly wrong if not managed properly.

With new innovations in bunker hedging, owners can protect themselves on price but keep flexibility on pretty much everything else.

So what’s the catch?

CON I: Prices might drop, leaving you with uncompetitive bunkers

In this case, owners could choose to lift spot bunkers and roll their hedged volume to the following month or quarter.

Eventually, the bunkers have to be lifted. But the port, vessel and timing of the lift remains in the buyer’s option.

CON II: No quantity range

When booking spot bunkers, suppliers offer quantity ranges (e.g. 700-900mt).

With Fixed Forward Prices (“FFPs”) volumes have to be fixed, even if the owner isn’t sure yet. There are several ways to deal with this:

(i) Hedge the minimum amount and add the balance on the spot market. e.g. Fix 700mt and add 200mt at the spot price at time of nomination (78% hedged).

(ii) Hedge the expected amount and if the final quantity is less, lift the balance on another vessel. e.g. Fix 900mt. If only 800mt is needed, lift 100mt on another vessel or settle it out.

(iii) Hedge 900mt and split it across multiple vessels. e.g. 500mt, 300mt, 100mt.

Ultimately, even after fixing owners can lift the fuel on a different vessel, on different dates, at a different port and different quantity without any penalties or extra costs.

To learn more and get started:

(i) Contact our Price Risk Management experts at team@bunker-ex.com.

(ii) Download our worked examples of hedging flexibility here.

(iii) Access our pricing screen here (free for shipowners).