26th March 2010 - Bunker Prices - Up, Down, Up (And Stable?)

The volatility in oil prices has of course led to the same volatility in bunker prices.  From the start of 2007 to their peak in July 2008 oil prices increased from $51/bbl to $146/bbl (for Brent).  This pushed average 380 cst bunker prices from $250/ton to just above $700/ton.  The main reason behind such a big rise was the strength in economic growth, which supported an increase in oil demand to levels that were very close to world oil production capacity.  The mid 2008 economic crisis then meant these fundamentals were quickly reversed, with a collapse in oil demand and prices.  Brent fell to a low of only $38/bbl and bunkers were close to $200/ton, their lowest for 4 years.

However, this downturn in prices was short-lived as OPEC made major production cutbacks, and the expectation of a rebound in economic activity (leading to growth in oil demand) pushed futures prices higher from the start of 2009 onwards.  Over the past 6 months oil prices have been relatively stable, trading in the $70-80/bbl range.  Consequently, recent bunker prices have been more stable than at anytime in the past 4 years, at close to $450/ton.

This extreme price volatility over 4 years has not only impacted on bunker costs; there has been a huge impact on the Worldscale flat rates.  Flat rates are based on historical bunker prices over the period October to September (e.g. 2010 flat rates are based on prices from Oct 2008 to Sep 2009, as shown by the blue dashed lines on the graph).  As a result of the 2007/08 price hike, 2009 Worldscale flat rates for long haul voyages increased by a massive 40%.  The 2008/09 price fall then led to the sharp drop in Worldscale flat rates for this year, which were down 25% for long haul voyages.

Now, the rebound and stability in prices since last October will result in another major revision to flat rates next year.  We have had 6 months of data that will go into the 2011 Worldscale calculations.  This, coupled with the stable price outlook for the next 6 months, implies Worldscale flat rates for long haul voyages will rise by 25% next year.  Hence, we will face another big change in Worldscale spot rates at the start of 2011.