Sep 11 / Victor Arduin

Energy Weekly Report - 2023 09 11

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"Until now, VLSFO has been the economically preferable choice, but this year's low natural gas prices have shifted that perspective. With refining expansion progressing at a slower pace, LNG may become a more viable option for commercial vessels."

Importance of LNG for Maritime Transport

  • IMO 2020 marked a crucial transition towards more sustainable fuels, with LNG emerging as an economically advantageous option this year, which could have significant implications for the maritime transport sector.
  • The factors pressuring natural gas prices also strengthen LNG as a viable option. Production in the United States is on the rise, with record-breaking prospects in 2023, and European stocks are robust, reducing the risk of shortages.
  • New inflation data in the United States this week are causing concerns in the market. A more restrictive interpretation of the price landscape in the country could raise expectations for further interest rate hikes this year.
  • Although OPEC+ has established fundamentals that restrict the oil market, a stricter stance on U.S. monetary policy could promptly reduce global demand.


The IMO 2020 regulation brought significant changes to maritime trade, compelling commercial ships to transition from high-sulfur fuel oil (HSFO) to more sustainable options such as very low-sulfur fuel oil (VLSFO) or Liquified Natural Gas (LNG).

Until now, VLSFO has been the economically preferable choice, but this year's low natural gas prices have shifted that perspective. With refining expansion progressing at a slower pace, LNG may become a more viable option for commercial vessels.

Natural gas stocks are currently considerably high in Europe, reducing the risks of shortages that could result in rapid increases in natural gas prices. Furthermore, the United States has emerged as a significant producer, increasing its production in recent years. Therefore, there are no indications that LNG may appreciate rapidly this year, making its potential as a cleaner and more cost-effective energy source for the maritime transport sector even more evident.

Meanwhile, this week will bring new data on inflation in the United States. The Consumer Price Index (CPI) report is expected to be of particular importance ahead of the next Federal Reserve meeting on September 19-20, where the United States Central Bank will make decisions about the country's interest rate trajectory.

Despite considerable improvements in inflation in 2023, some inflationary risks are still present and could bring volatility to the energy market. Although the fundamentals for oil remain solid, supported by OPEC+ supply constraints, the possibility of higher interest rates may result in a stronger U.S. dollar, making the commodity more expensive for holders of other currencies and potentially slowing down economic activity, which is closely linked to energy consumption.

Image 1: Performance VLSFO vs. Natural Gas (Indexed on 30/12/2022)

Source: Refinitiv

Natural gas emerges as a viable option for maritime fuel

Fuels represent one of the largest expenses in maritime transportation, and in recent months, the prices of these fuels have undergone significant changes, introducing new dynamic not seen in years. With the IMO 2020 regulations aimed at reducing sulfur emissions into the atmosphere, the maritime transportation industry found itself faced with a choice among three options: Very Low Sulphur Fuel Oil (VLSFO), LNG, or the installation of gas cleaning systems (scrubbers).

Since the implementation of the regulations in October 2019, the energy market has experienced considerable volatility. During the COVID-19 crisis, energy commodity prices decreased, making the use of VLSFO more viable. Subsequently, prices rose rapidly, making the installation of scrubbers an attractive alternative. Now, in 2023, the decrease in natural gas prices has made the use of LNG economically viable for vessels.

Image 2: Brent Spot Price Compared to VLSFO

Source: Refinitiv

For example, the price of LNG has proven to be more advantageous compared to VLSFO at the port of Rotterdam, a phenomenon that had not occurred for over two years. The recent supply restrictions by OPEC+ have driven up oil prices, making bunker fuel a more expensive option for maritime fuel. Consequently, commercial ships having the choice of which fuel to use is a significant advantage.

According to a study by Clarksons, there are currently 936 commercial vessels capable of operating on dual fuel, and another 876 are on order. The ability to use both types of fuel offers valuable flexibility, allowing a choice between fuel oil or LNG based on the most favorable market conditions, which is a great benefit in the face of price fluctuations. Companies in the sector are paying close attention to this opportunity.

Image 3: Key Natural Gas Futures Benchmarks

Source: Refinitiv

Interest rates are one of the impediments to oil

The elevation of interest rates, used as a monetary policy tool to combat inflation, has proven effective but significantly impacted the price of oil in the first half of 2023. As U.S. prices stabilized at more comfortable levels, Brent and WTI have found room to recover, as evidenced by Chart 4.

The market will be closely watching the August inflation outcome, which will be released on September 13. A very high number could fuel concerns that the Federal Reserve (Fed) will keep interest rates higher for longer or raise them in the coming months. This would give the market fewer reasons for a bullish position on energy commodities.

The market expects the U.S. Central Bank to keep interest rates unchanged at its meeting on September 20. However, expectations for a rate hike in the November meeting are increasing, which would result in a bearish sentiment for oil.

Image 4: Comparison between Major Oil Benchmarks and 2-Year U.S. Treasury

Source: Refinitiv

In Summary

Despite the growth in LNG supply infrastructure, its availability remains limited compared to traditional options, which poses a challenge for widespread adoption, especially in remote or less developed regions.
Nevertheless, since the introduction of IMO 2020, there has rarely been such a favorable scenario for LNG adoption. This year has brought a different story, with high maritime fuel prices and bearish fundamentals for natural gas, making the use of LNG an advantageous choice for vessels.

Finally, this week stands out as one of the most important of the month, second only to the upcoming Fed meeting next week. The direction of interest rates in the United States is crucial in understanding the potential trajectory of energy commodity prices.
Despite the success of OPEC+ efforts so far, higher or sustained high interest rates for an extended period carry the risk of a recession, which could result in reduced demand for oil and its derivatives.
Furthermore, a few events are expected to bring short-term volatility. Hundreds of workers are threatening to go on strike in Australia, potentially disrupting the country's natural gas production, which accounts for 5% of global supply.

Weekly Report — Energy

Written by Victor Arduin
Reviewed by Livea Coda


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