Fuel cost

Bunker pricing and hedging

Published 28 August 2026 · updated 17 October 2026

On most voyages, fuel (called bunkers) is the largest single cost the owner controls, and it is the only line on the voyage estimate priced in a traded market. The freight is agreed once and port charges follow a fixed tariff, but the bunker price changes every day between the moment a fixture (the deal) is agreed and the moment the ship stems (orders and takes on its fuel). The freight does not change with it.

There is no world bunker price

A bunker price is a delivered price. It is for a named port, a named grade, a named day, a stated quantity and stated delivery terms. If any of these changes, the price is different. The large, busy fuel hubs set the reference price. Singapore, Rotterdam, Fujairah and Houston are among them. Every other port is priced as an extra amount (a premium) over the nearest hub. In a small or remote port, that premium can be large, and you cannot negotiate it.

The price on the invoice is built up in layers:

• The cargo price. This is the wholesale value of the fuel at the hub. A price reporting agency publishes it every day as an assessment. For the low sulphur fuel that meets the rules, the most widely used assessment is Marine Fuel 0.5 per cent FOB Singapore.
• Delivery. This depends on whether the fuel comes by barge or by pipe, the quantity, the waiting time, and whether the ship takes it at a berth or at anchor.
• The supplier's margin and credit. Suppliers sell bunkers on credit. A buyer with weak credit pays more, or the supplier refuses to supply at all.

So the cargo price in a market report is not the price a ship pays. The delivered price is higher. The delivered price is the one that belongs in a voyage estimate.

Grades are separate markets

In 2020 the global limit on sulphur in ship fuel fell to 0.50 per cent. Since then, ships burn one of three fuels. The first is low sulphur residual fuel that meets the limit. The second is distillate, a lighter and cleaner fuel. The third is high sulphur residual fuel, burned with an exhaust gas cleaning system (a scrubber) fitted. These are three different products. They have three different prices, and the prices do not move together.

The price gap between high sulphur and low sulphur residual fuel is the only economic reason to fit a scrubber. That gap is not stable. At times it has been wide enough to pay back the equipment quickly. At other times it has been so narrow that the scrubber became a cost that could not be recovered. Inside an emission control area, the sulphur limit is stricter again. Some estimates use one average price per tonne for a voyage that passes through a control area. Such an estimate hides a real cost difference inside the average. Bunkers and fuel grades explains the fuels themselves. Emission control areas explains where the stricter limit applies.

The exposure starts when you fix, not when you buy

This is the key idea, and people new to the trade often misunderstand it. Under a voyage charter, the owner agrees a freight rate today for a voyage that may load in three weeks. The owner buys the fuel for that voyage later, at whatever it costs then. So from the moment the fixture is agreed, the owner is exposed to the fuel price. The owner has sold a service at a fixed price, but one of its costs is not yet fixed.

Buying the fuel does not create this exposure. Buying the fuel ends it. On every day between the fixture and the purchase, the owner carries the price risk. On a cargo far in the future, or on a contract of affreightment (an agreement to carry many cargoes over time), this is a very large price risk. It is held by a company that would never describe itself as an oil trader.

Under a time charter, the charterer buys the fuel. So the exposure sits with the charterer instead. This means the first question about hedging is not "how" but "whose". If a desk gets that wrong, it hedges a risk it does not have.

Three ways to stop it moving

Push it into the contract. A bunker adjustment clause (also called an escalation clause) moves all or part of the fuel risk to the other party. It does this by linking the freight to a named price index, or by allowing a surcharge. These clauses are common in long-term contracts of affreightment and in liner-style trades. They are less common on a single spot voyage. They are always negotiated, because the risk does not disappear. It only moves to someone else.

Fix the price of the real fuel. Buy the real fuel from a supplier now, for delivery at a future date at an agreed price. This removes the price risk and the delivery risk together. That is its advantage. But it creates counterparty risk, which is the risk that the other party fails. A forward physical contract is only good if the supplier still exists, and still supplies at that port, on the day. Bunker suppliers have failed in the past, and buyers lost everything they had paid in advance.

Hedge on paper. Buy a swap or a future on the matching price assessment, most commonly Marine Fuel 0.5 per cent FOB Singapore or the Rotterdam barge version. These contracts are listed on CME and ICE and settled in cash against the average of the published assessment over the contract month. If the price rises, the real fuel costs more and the paper contract pays out; if the price falls, the opposite happens. The paper contract never delivers any oil, and it is not meant to.

Basis risk, which is what people mean when they say the hedge failed

A paper hedge settles on a published assessment. Your ship buys fuel at a delivered price. These are two different prices, and the gap between them can change by itself. This gap is called basis risk.

• Location. You hedge on Singapore, but the ship buys in Durban. The two prices usually move together. Sometimes they do not, and the gap is not covered.
• Grade. You hedge low sulphur residual fuel, but the ship buys distillate for a leg in a control area. These are two markets. They are linked, but not the same.
• Timing. The contract settles on a monthly average. The ship buys on one day. Even if location and grade match perfectly, this gap remains. In a month when prices swing, it can be large.
• Quantity. Contracts trade in fixed lot sizes. The ship buys whatever the voyage needs.

This does not make hedging useless. Hedging turns a large, uncertain exposure into a small, uncertain one. That is its purpose. But some desks expect the two sides to cancel out exactly. The first time they do not, such a desk will decide the hedge is broken.

The cash cost of being right

A cleared position needs margin, which is cash held as security. If the market moves against the paper contract, the clearing house asks for cash at once. But the matching saving on the real fuel only arrives when the ship buys its fuel. On the freight side, it only arrives when the voyage is paid. So a hedge that is right in economic terms can still use a lot of cash in the meantime. A small owner can be right about the price and still not have the cash to hold the position. Hedging is a treasury (cash management) decision first, and a chartering decision second.

What to do if you are not hedging

Most small desks do not hedge, and that is a reasonable choice. What is not reasonable is pricing an estimate on an old number and calling the result safe. Two habits cost nothing. First, price each fuel grade separately instead of using one average. Second, write on the estimate the date of the fuel price you used. The time charter equivalent article shows how much the daily figure changes from a change in the bunker price alone. The change is usually larger than the amount at stake in a typical argument over the freight rate.

References

• International Maritime Organization, IMO 2020: cutting sulphur oxide emissions. imo.org
• CME Group, Singapore FOB Marine Fuel 0.5% (Platts) Futures contract specifications. cmegroup.com
• ICE, Marine Fuel 0.5% FOB Singapore (Platts) Future. ice.com
• BIMCO, Bunker Terms 2018. bimco.org
• BIMCO and IBIA, Bunkering Guide, 2018. PDF

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