Euronav flags bunkers writedown as coronavirus derails hedging strategy

By : Michelle Wiese Bockmann

EURONAV has flagged a significant writedown in May this year when the tanker owner releases its first quarter results as tumbling fuel oil prices have derailed the physical hedging programme it launched in 2019 to ensure a secure supply of low-sulphur marine bunkers.

Compliant fuel oil prices in Singapore are 278% lower than January’s levels, leaving Euronav on the wrong side of its risk management strategy. That strategy centred on the purchase and storage of compliant bunkers in mid-2019 ahead of the global regulatory switch to lower-sulphur fuel, anticipating volatile and uncertain supplies for the Euronav fleet.

The Antwerp-headquartered owner and operator of 76 very large crude carriers and suezmax tankers said last September that it borrowed some $100m to finance the $200m purchase of 2020-compliant fuel oil. The purchase price averaged $447 per tonne for some 420,000 tonnes of marine fuel. The fuel was stored on its ultra-large crude carrier Oceania and positioned off Malaysia in floating storage to supply the Euronav fleet. Plunging oil prices amid the coronavirus outbreak, accompanied by abundant very low sulphur fuel oil supplies, has left the price for 0.5% compliant fuel assessed at below $234.75 per tonne this month, from as high as $653.75 per tonne on January 6, according to Argus Media.

“The low sulphur fuel oil purchased by Euronav last year in anticipation of IMO 2020 price volatility — and which has not been consumed yet — will be subject to a mark to market valuation at the end of the first quarter and will lead to a writedown as the current market is significantly below the acquisition cost,” the company said in its annual report released today Euronav was using cheaper feedstock from buying low-sulphur fuel oil on the open market, it said in a statement. The company, which reports first-quarter results in May, said it was “too early” to quantify the impact due to the coronavirus outbreak on future results, adding that any forward-looking statements should be regarded with caution because of the inherent uncertainties in economic trends and business risks related to the outbreak.

“The large tanker market has been boosted by the move from Saudi Arabia to unilaterally increase oil supply, which will underpin freight rates for much of 2020,” the statement added. “However, the duration and scale of the impact from economic dislocation from coronavirus will be a key driver of tanker markets for the remainder of 2020.” Global crude demand is estimated to have fallen by 20%, or 20m barrels per day over March and April, equivalent to an average 5m bpd decline more than 2020. About half of the 100m bpd of crude supplied is shipped in tankers, with VLCCs transporting about 42% of these volumes. Saudi Arabia’s pledge to flood the market with crude as demand plunges on an unprecedented scale has reignited a rally in crude tanker rates amid a flurry of fixtures for floating storage as land-based storage capacity is strained. Baltic Exchange VLCC rates were assessed at a time-charter equivalent of $198,583 per day on March 30, doubling in just over four days.





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