Neptune Atlas

Fuel cost

Bunker pricing and hedging

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On most voyages fuel is the largest single cost the owner controls, and it is the only line on the estimate that is a traded market. Freight is negotiated once. Port charges are tariffed. The bunker price moves every day between the moment a fixture is agreed and the moment the ship actually stems, and the freight does not move with it.

There is no world bunker price

A bunker price is a delivered price, at a named port, for a named grade, on a named day, for a stated quantity and stated delivery terms. Change any of those and it is a different number. The liquid hubs, Singapore, Rotterdam, Fujairah and Houston among them, set the reference. Everywhere else is priced as a premium over the nearest hub, and in a small or remote port that premium can be substantial and is not negotiable.

What arrives on the invoice is a stack:

So the assessed cargo number that appears in a market report is not the number a ship pays. The delivered price is higher, and it is the delivered price that belongs in a voyage estimate.

Grades are separate markets

Since the global sulphur limit fell to 0.50 per cent in 2020, the fleet burns compliant residual fuel, distillate, or high sulphur residual behind an exhaust gas cleaning system. Those are three different products with three different prices that do not move in step.

The spread between high sulphur and compliant residual fuel is the entire economic case for fitting a scrubber, and it is not stable: it has been wide enough to repay the equipment quickly and narrow enough to make it a stranded cost. Inside an emission control area the requirement tightens again. An estimate that uses one blended price per tonne across a voyage that crosses a control area has buried a real cost difference inside an average. Bunkers and fuel grades covers the products themselves, and emission control areas covers where the tighter limit applies.

The exposure starts when you fix, not when you buy

This is the sentence that matters, and it is the one newcomers get backwards. Under a voyage charter the owner agrees a freight rate today for a voyage that may load in three weeks. The fuel for that voyage is bought later, at whatever it costs then. The moment the fixture is agreed the owner is short fuel: he has sold a service at a fixed price with an unfixed input.

Nothing about that exposure is created by the act of stemming. Stemming ends it. Every day between the fixture and the stem is a day the owner carries the price risk, and on a long-dated cargo or a contract of affreightment covering many voyages, that is a very large position taken by a company that would never describe itself as trading oil.

Under a time charter the fuel is bought by the charterer, so the exposure sits with the charterer instead. The first question in any discussion about hedging is therefore not "how" but "whose". Get that wrong and a desk hedges a risk it does not have.

Three ways to stop it moving

Push it into the contract. A bunker adjustment or escalation clause moves the fuel risk to the other side, wholly or in part, by tying the freight to a stated price index or by allowing a surcharge. Common on long-term contracts of affreightment and liner-style trades, rarer on a single spot voyage, and always a negotiation because the risk does not vanish, it changes hands.

Fix the physical. Buy the actual fuel forward from a supplier for delivery at a future date at an agreed price. This removes price risk and delivery risk together, which is its attraction. It also creates counterparty risk: a forward physical contract is only as good as the supplier still being there and still supplying at that port. Bunker suppliers have failed before, and the buyer's exposure was the whole prepaid position.

Hedge on paper. Buy a swap or a future on the relevant assessment, most commonly Marine Fuel 0.5 per cent FOB Singapore or the Rotterdam barge equivalent. These are listed at CME and ICE, cash settled against the average of the published assessment over the contract month. If the price rises, the physical stem costs more and the paper pays; if it falls, the reverse. The paper never delivers a drop of oil, and it is not supposed to.

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

A paper hedge settles on an assessment. Your ship buys a delivered stem. Those are not the same price and the difference between them can move on its own.

None of this makes hedging pointless. It makes hedging a way of converting a large uncertain exposure into a small uncertain one, which is what it is for. A desk that expects the two legs to cancel exactly will conclude the hedge is broken the first time they do not.

The cash cost of being right

A cleared position is margined. If the market moves against the paper leg, the clearing house calls for cash immediately, while the offsetting saving on the physical fuel does not arrive until the ship stems and, on the freight side, until the voyage is paid. A hedge that is economically correct can be a serious cash drain in the meantime, and a small owner can be right about the price and still be unable to fund the position. Hedging is a treasury decision before it is a chartering one.

What to do if you are not hedging

Most small desks do not hedge, and that is a defensible choice. What is not defensible is pricing an estimate on a stale number and treating the result as conservative. Two habits cost nothing: price the grades separately rather than blending them, and mark the fuel price on the estimate with the date it came from. The time charter equivalent article shows how far the daily figure moves on a change in the bunker price alone. It is usually more than the last argument over the freight rate was worth.

References

Bunkers and fuel gradesTwo grades and sometimes three, priced apart. The largest number on a voyage estimate is also the one nobody warrants. Emission control areasTen areas where the fuel a ship may burn is capped tighter than the global limit. Which lines are exact, which are traced, and which do not bite yet. Time charter equivalentFreight per tonne means nothing next to hire per day until you divide it by the voyage. This is the arithmetic that does it. Voyage charter vs time charterThe risk split behind the two main charter forms, what each side pays for, and which terms only exist on one side of it. Worldscale explainedWS 92.5 is a percentage of a published rate for one specific voyage. What the flat rate is, and why the same number means different money on different routes.

Neptune Atlas

The Neptune Atlas voyage estimator prices each grade separately at a figure you type in. There is no fuel price source behind it, deliberately: the article above explains why a stale or blended price is the input most likely to make an estimate wrong in an unknown direction. Every paid plan starts with 7 free days. A card is needed to start them, and cancelling before they end costs nothing.

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