Shipping Fuel Shortages Are the New Supply Chain Risk

[00:00:00][music] >> For much of the recent Middle East conflict, energy markets have focused on the risk of diesel and jet fuel shortages. But according to major commodity traders, a potentially more disruptive problem is emerging. Marine fuel, the fuel that keeps global shipping moving, is becoming increasingly scarce, raising concerns over vessel delays, supply chain disruptions, and trade congestion. I'm Johanna Botta, and joining us today to discuss why marine fuel is becoming the new weak link in global trade is Tom Bening, senior vice president of ocean freight at StoneX. Nice to see you again, Tom.

[00:00:38]>> Good morning, Johanna.

[00:00:40]>> Good afternoon to you. So, for some time, concerns around diesel and jet fuel have dominated the conversation.

[00:00:48]Why is the market now turning its attention to marine fuel, and what's driving those concerns?

[00:00:55]>> Yes, so I think what we have to look at is what's what's called the crack spread or or refined whenever refinery um >> [clears throat] >> cracks the barrel of crude oil, then it it goes for the highest margin products it possibly can to make as much money as they can in the refinery process. So, jet when when the Iran war initially started, um there was foreseen to be supply shortages of jet fuel, gasoline, diesel. And so, the refineries really focused around the world on producing those kind of products where they were getting the highest margins, the the the best prices.

[00:01:39]Marine fuel is a residual fuel, so it tends to be at the lower end of the barrel, and and those prices were not pulling hard enough from the refineries at that time.

[00:01:52]>> Okay, so it's basically just comes down to price.

[00:01:55]>> Yeah, it's certainly a price game. I think what had to happen in the marine fuel business was that prices needed to go up to re-establish marine fuel as a viable alternative to the refineries and producing that.

[00:02:13]>> So, what are the warning signs then that traders are watching?

[00:02:18]>> So, I think I think what we're looking at is the price of fuel not just in the main hubs around the world. So, Rotterdam, Singapore, New Orleans, Gibraltar.

[00:02:32]We're looking at also the fringe ports.

[00:02:35]So, in the main hubs we've seen pretty high increases in prices and what's what's really focused on on ship owners' minds is can I fill up my ship with reasonable price fuel which I can then sell to somebody else as we employ the ship or am I going to have to go to a fringe bunker port where the spreads between the major bunker ports and the fringe bunker ports has really exploded to a point which is really a disaster for for ship owners out there.

[00:03:13]>> You mentioned Singapore as one of the hubs. Why is Singapore so important to the story and what does its inventory situation tell us about the broader market?

[00:03:23]>> Right, so Singapore is the gateway to Asia.

[00:03:26]Every ship that comes basically in and out of Asia being China, Japan, Korea from um the Atlantic Ocean needs to go via Singapore mainly because they don't go via the via Cape Horn because of the bad weather. So, you you bring those ships via Singapore and the Straits of Malacca. So, there literally of ships passing through those straits and and passing a port every day. Singapore became built the infrastructure for for for fueling ships and has built a whole industry around supplying ships for stores, repairs, and so but but bunkering which is the fueling of ships has become a very large business in Singapore.

[00:04:14]>> Okay.

[00:04:14]>> Um yeah, so literally hundreds of ships gets get fueled in Singapore every day.

[00:04:22]>> So, unlike crude oil markets, shipping does not have strategic fuel reserves.

[00:04:27]Why does that make the situation potentially more dangerous?

[00:04:31]>> I think it it goes back to what I was saying about fringe ports.

[00:04:35]Uh where where a lot of of fueling of ships takes place um and particularly on the smaller sizes when you go into areas of the world where they don't have large storage capacity for fuel. Um so, what it makes it dangerous because the owners are concerned they're not going to get the fuel that they need uh to keep the ship going. And so and and I'm seeing this on even like some of our own trades within StoneX where where ship owners need to know exactly where the ship's going.

[00:05:10]>> Yeah.

[00:05:10]>> Uh so that they can call the agents in the ports and reserve fuel uh because it's not guaranteed. And that's that's a real danger signal that um some trades and particularly in the smaller sizes may find it very very difficult to secure fuel in ports. That means ships have to deviate and then it we really start to increase inefficiency.

[00:05:33]>> Yeah, so I mean that's obviously one of the ways that it could disrupt it. And if marine fuel shortages do become more widespread, how could that disrupt other things like global supply chains and more trade flows?

[00:05:48]>> [sighs] >> Yeah, so prices uh prices will go up. There's no question on delivered the freight cost to deliver commodities across the ocean and dry bulk is is the largest uh amount of commodities moved 5.7 billion tons a year. So, you're going to see a lot of potential inefficiency in that.

[00:06:15]Um and and what you what you'll for sure see is an increase in cost because fuel prices have to go up uh you know, to attract additional supply to come in and and look for additional margins and fueling ships and therefore fuel for voyage costs have to go up.

[00:06:34]>> Can I ask you why is dry bulk so exposed to marine fuel shortages?

[00:06:40]>> So, dry bulk is the is primary industries, right? So, it's iron ore to produce steel. It's bauxite to produce aluminum.

[00:06:54]Uh it's coal to produce energy. These aren't typically not high high value products and therefore the the percentage of the cost of the voyage which is in fuel is much higher than in other commodities.

[00:07:12]And what you see in dry bulk is that uh as the the that percentage goes up, so trade start to reduce. And you know, just to give you an example on grain. If you it is roughly 700 million tons of grain moves around the world.

[00:07:30]If you start to increase that cost of fuel considerably, then Europeans can buy locally rather than importing grain.

[00:07:41]Uh so, they stop they stop the trade. So it you you will see dry bulk trade start to dry up sooner rather than other commodities because of the percentage of the fuel cost is much higher in the voyage.

[00:07:56]>> Understood. Tom, thank you again for joining us and for keeping us up-to-date on the subject. And thank you to our viewers for watching. For more financial content, don't forget to like and subscribe to our channel.

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