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Shipping Fuel Costs: The Unseen Enemy In The Fight Against Inflation

Courtesy of ZeroHedge View original post here.

By Irina Slav of OilPrice.com

Bunker prices are on the rise. This is not news in itself: it would have been surprising if the price of one oil derivative was down when the prices of all others were up. Yet it is becoming a cause for concern as higher bunker costs push maritime transport costs higher.

With much of global trade relying precisely on maritime transport, higher prices are adding to already substantial inflationary pressures. And there doesn’t seem to be light at the end of this tunnel.

Bunker prices climbed close to a record high earlier this month, with the average for very low sulfur fuel oil prices rising by 55 percent over 12 months to hit $731.50 per metric ton. Since then, prices have risen further. According to Ship & Bunker data, the average price for VLSFO among the world’s top 20 ports stood at $740 per metric ton. VLSFO is the most widely used marine fuel.

One reason for this price rise seems to be the overall rebound in demand for fuels as economies return to normal after lockdowns. Another is that very low sulfur shipping fuel oil is generally more expensive than the higher-sulfur versions. Yet the International Maritime Organisation’s sulfur emission rules stipulate that vessels either need to use VLSFO or install scrubbers to remove sulfur from their bunkering.

Higher crude oil prices are one more factor in the bunker price rise, of course, but another reason, however, spells more trouble. According to a Bloomberg report from this week, refiners are prioritizing gasoline and diesel production over bunker because of strong demand. And this means less crude will be available for the very low sulfur fuel oil that the majority of ships use.

Inflation in the United States surged to 7.5 percent last month, the highest in almost 40 decades. In the eurozone, inflation hit an all-time high of 5.1 percent. In the UK, prices rose by 5.5 percent last month, which was the highest since the early 1990s, three decades ago. And with higher bunker prices, these figures are likely to remain high. At the same time, they might lead to slower deliveries in a world still battling the consequences of pandemic-related supply chain disruptions that have become notorious.

Freight Waves senior editor Greg Miller wrote in a recent article, citing Vespucci Maritime CEO Lars Jensen, that ten years ago, a rise in bunker prices “triggered a wave of emergency fuel surcharges as well as a further step into super-slow-steaming by ocean carriers.” Slowing down is what ship-owners do to cut costs. But it’s not the only thing ship-owners do to mitigate the effects of rising costs.

Says Jensen, as quoted by Miller, this time around, “high [fuel] prices have to be seen in the context of the supply chain bottlenecks. Slow steaming to mitigate the impact from high fuel prices only makes financial sense if you have excess capacity, which was the case in 2012. If you do not have overcapacity, it is more sensible to increase freight rates instead and maximize asset utilization, which is the case right now.”

“It’s one more reason why global commodity prices and inflation are so high,” Wood Mackenzie analyst Mark Williams told Bloomberg. And it’s likely that commodity prices will remain high because there is no additional crude oil supply on the horizon unless the United States strikes a deal with Iran. Even then, prices may remain elevated because many traders have already factored the Iranian barrels into prices.

Higher shipping costs is one of the worst pieces of news excess inflation-stricken economy could receive as they try to tackle the problem. Yet it seems, based on the factors at play, that higher shipping costs were only to be expected in the post-pandemic context. How long they remain elevated will depend on oil price and fuel demand developments.


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