Navigating complexity
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I. Increasing Price Volatility and Unpredictability
There are many factors influencing marine fuel production and prices which include but are not limited to: Wars, natural disasters, distribution bottlenecks, sanctions and refinery curtailments. Geopolitical risks which currently, are sadly plentiful – Ukraine war, Israeli conflict, Venezuela sanctions, Houthi attacks – have also driven significant fluctuations in marine fuel/bunker prices. Supply disruptions both planned (maintenance) or unplanned outages from weather events such as hurricanes can disrupt fuel production and lead to short-term price increases.
The push towards low-carbon alternatives and compliance with carbon taxes, emissions trading schemes, and mandates on zero-emission fuels is adding significant costs to fuel prices as operators invest in more expensive alternatives like LNG or biofuels. Some large shippers such as consumer goods companies are further exacerbating pressure on ship owners by increasingly demanding cleaner shipping practices.
We foresee ongoing volatility – The new normal
The chart below illustrates the fluctuating price of Brent crude oil from the beginning of this year, specifically from January 2nd to the current date. In January, Brent was priced at US$75, representing a relatively stable start to the year. However, by April, the price saw a significant increase, peaking at US$92 driven by market factors: stock draws, OPEC cut extensions, weaker dollar and further geopolitical tensions.
As the year progressed, this peak was not sustained. By June, the price dropped back to US$76, with fading war risk and uncertainty on interest rates. Following this, July saw a rebound, with the price rising again to US$88, indicating the volatile nature of the oil market cuts and increasing supply led to a repricing.
Most recently, the price has corrected again to US$69, marking a new low for the year as fresh assumptions on forward supply/demand expectations take hold.
This pattern of fluctuations – sharp rises followed by steep declines – represents what many now refer to as the “new normal” for Brent crude oil prices. These market movements suggest that rather than expecting a stable upward or downward trend, the market will likely experience ongoing swings influenced by rapidly changing geopolitical, economic, and environmental factors – a new normal with volatility expected to continue as part of the current oil market landscape.
II. Managing Price Risk is Costly & Complex for Fleet Owners
One important point to note, marine fuel costs can represent as much as 50-60% of total ship operating costs, depending on the type of ship and service. This varies extensively depending on ship sizes – regardless, fuel is a significant cost for shipping operators.
Having the ability to remove this existential balance sheet risk gives the shipowner the complete visibility to fully focus on its specialist business, and to no longer worry about the vagaries of the global oil market and other exogenous shocks. Moreover, by smoothing earnings shipowners are more likely to accelerate their adoption to costlier transition fuels.
Financial tools like forward contracts, swaps, and OTC hedging (e.g. VLSFO, marine diesel) may in some cases be used to mitigate price risk. However, these products are complex, requiring costly and expose shipowners to unnecessary risk and they are not created with the needs of industry in mind.
Accessing these tools requires specific skill sets such as trading and energy expertise and bringing this expertise inhouse incurs significant costs (e.g., hiring, financing)
Complex derivatives structures have the potential to be extremely detrimental to cash flows: if the price of the forward gas oil swap or swaps moves below the traded level prior to eventual settlement, the ship owner must provide margin to the bank to cover the “mark to market” move. In extreme moves, this can be a significant amount of cash, tens of USD$ millions or more, usually coinciding with material reductions in revenues because of a macro-economic global demand slowdown (e.g. GFC and Covid).
Other risky derivative instruments are used such as “zero cost” collars (ZCC) whereby a shipowner buys a higher strike call option but finances it via the sale of a lower strike put option. During Covid, gas oil/VLS fuel prices collapsed and shipowners who hedged with ZCCs were exposed to huge margin calls, and a capital liquidity drain, as a result of having sold the lower strike puts, which coincided with a decline in company revenues as global demand collapsed. Selling downside puts is akin to giving away the opportunity gain of being able to buy lower priced physical jet fuel should prices decline.
III. Not Hedging is Also a Financial Risk
Frequency of Price Shocks: Events like SARS (2004) and COVID-19 had drastic impacts on revenues, underscoring the risk of price volatility. In the chart below, these shocks are clearly visible – however, there are also other frequent shocks that highlight the ongoing vulnerability of ship owners to unexpected events.
These shocks may stem from various sources as highlighted above including geopolitical tensions, natural disasters, regulatory changes, or supply chain disruptions.
Additionally, the frequency and scale of these shocks suggest that price instability is not limited to global pandemics but is a persistent feature of the modern economic landscape. Certain sectors, such as shipping, are more prone to disruptions than others.
This raises important considerations for diversification, hedging, and strategic planning in an increasingly interconnected global market. Not hedging is equally a strategic decision and has an inherent risk. Shipowners are left to respond to market movements by short term means such as freight price increases.
IV. Shipowners Regularly Insure Other Costs
Fleet operators, as a matter of standard business practice, insure various critical assets and liabilities to safeguard against operational risks. This includes coverage for hulls & machinery (H&M), which protects the physical structure and machinery of vessels from damage or loss. Protection and indemnity (P&I) insurance is also a key component, offering coverage for third-party liabilities such as injury to crew members, environmental pollution, or cargo-related claims.
In addition to these, fleet operators often insure against loss of hire (LOH), which compensates them for revenue lost when a vessel is out of operation due to an insured event, such as damage or repairs. Kidnap and ransom (K&R) insurance is another critical coverage, particularly in regions with higher risks of piracy or hostage situations, ensuring that operators are financially protected in the event of such incidents.
The cost of these insurance premiums is accounted for as a technical cost, meaning it is categorized separately from other operating expenses (OPEX) or commercial costs. Technical costs specifically relate to the maintenance, safety, and operational viability of the fleet, while OPEX encompasses day-to-day operational expenses, such as crew wages, fuel, and port fees. By distinguishing insurance costs as technical expenses, fleet operators ensure a more precise allocation of resources, and a clearer understanding of the financial burden associated with safeguarding their assets against operational risks.
This separation is crucial for budgeting, financial reporting, and risk management, as it allows operators to monitor and control technical expenditures that directly impact the fleet’s operational readiness and resilience to unforeseen events.
If a ship for example, has an accident this also results in operational time out for repairs, there is a resulting loss of income.
Shipowners are therefore accustomed to insuring their fleets for hull and liability risks to preserve revenue with clear visibility of the operational cost of the insurance itself. The frequency and technical price for these risks, at a catastrophic level, is priced at approximately a 1:50 to 1:100 years event basis.
The maritime market has not had an insurance product for marine fuel price risk, and either not hedged these costs (which can be up to 60% of business costs) or has used swaps or ZCCs as above. By using these products, and taking on the associated margin risks, the irony is the maritime market is uninsured for the significant/catastrophic risk of a sustained marine fuel price downwards move of between a 1:3 to 1:4-year frequency of significant earnings events and around a 1:7-year risk of catastrophic financial distress (see the graph below for an analysis of a policy versus swaps peformance).
V. Recovering Costs through Freight Rates
Is This Strategy Effective? The Market is the Market
Though marine fuel price risk insurance is now on offer – many shipowners still hold onto the adage that they recover increased marine fuel costs by raising freight rates. Charted below is the monthly marine fuel price (blue line) versus freight rates (orange line).
First, there is a noticeable time lag—averaging around four months—between fuel price increases and the corresponding rise in freight rates, as shipowners adjust to compensate for the higher fuel costs. The length of this lag is influenced by vessel size. For instance, very large crude carriers (VLCCs) typically have voyages lasting about three months, meaning several months may pass before a ship returns to port for refuelling, and the effects of increased fuel prices are felt in freight rates.
Second, there is often a distinct disconnect and break down in correlation between freight prices and fuel costs, where freight rates often behave unpredictably. The freight market, though it attempts to recover rising bunker costs by increasing rates, is highly volatile and subject to factors beyond fuel prices alone.
When fuel costs drop, competition intensifies as businesses seek out lower cost shipping options, driving freight rates down and making it difficult for operators to pass on additional costs. This erratic behaviour makes the relationship between fuel and freight prices complex and inconsistent over time. Having the ability to work to budgeted costs and evacuate 100% of the underlying oil price risk should be seen as an industry best practice in managing existential risk.
VI. Future Volatility & Regulatory Pressure
Increasing Uncertainty: Ongoing pressure to decarbonise the industry, leading to increased operator costs.
Transition to new fuel types (e.g., carbon taxes, emissions trading schemes, zero-emission mandates) is expensive and to some degree inevitable.
A marine insurance product removes the need to deal with costly, complex, time-consuming, and often opaque traditional hedging products.
VII. Why Run the Risk?
The analysis clearly shows that volatility and uncertainty are persistent and critical aspects of the marine fuel market. However, shipowners typically hedge fuel purchases from stem to stem, with short-term strategies that leave them vulnerable to frequent yet unpredictable price shocks.
The key to navigating this complexity is to adopt a long-term mindset and approach to managing the business, with sustained coverage in place. While swaps and other hedging instruments can mitigate some risks, they are still subject to market fluctuations, leaving shipowners exposed to sudden changes. Considering that ships are floating assets worth between US$50–100 million, with lifespans of up to 15 years before their trade value starts to decline, optimizing their revenue potential demands a more thorough and forward-thinking strategy for managing fuel costs.