Understanding the Impact of Bunker Oil Prices on the Costs of Shipping

Posted by Clipper Oil on December 16th, 2017

The maritime industry is responsible for a significant portion of world trade. It accounts for 90% of total trading operations. Therefore, the costs of shipping largely affect the prices of merchandise as well. This industry heavily relies on cost effective bunker fuel to support their massive engines. Hence, it becomes important to understand the relationship between bunker fuel prices and shipping costs. Rising prices of fuel are traditionally considered to be a major factor for increased shipping costs. However, trends have slightly changed during the past few years when fuel costs plummeted drastically but didn’t necessarily translate into lower operating costs.
 There are varying reasons for this drastic fall in the bunker fuel price. Geopolitical conditions, weak economies, and downward demand trends have led to this reduction. To understand the relationship between these factors, here are some main points to know:

Costs of Bunkering at Sea:

Bunker oil is the fuel derived from the bottom of a barrel. It is the residual fuel of crude oil. It costs significantly less than the traditional sources of fuel. Shipping costs are determined on the basis of bunker fuel prices. Shipping companies can save a lot of money by opting for high seas bunkering. They can save on port fees and travel costs incurred with bunkering in port. This fuel comes in many variants with differing levels of refinement.

Bunkering Adjustment Factor:

BAF or Bunkering Adjustment Factor is also an essential factor affecting the costs of bunker oil. Volatility in prices used to be prevalent in this market. Hence, it became essential to bring stability by introducing BAF as a surcharge. This amount is adjusted on a quarterly basis by adding to the base freight offered by the shipping companies. In this regard, be mindful that the bunker oil price will continually change but these factors aren’t permanent.

Other Factors Affecting Shipping Costs:

Apart from bunker oil prices, there are many other factors affecting the costs of shipping in the maritime trade. There is no direct relationship between crude oil and marine oil prices. Bunker oil requires less processing and refining unlike other forms of fuels. This oil is used after heating to run the engine of the vessel. Hence, you can’t determine the price of bunker fuel on the basis of crude oil prices.

In the marine industry, price calculations are made on a quarterly basis. Hence, price reactions are slow compared to the daily fluctuations in prices. Lastly, bunker fuel costs vary from one port to another. Sometimes it is sold through physical contracts. This factor applies to bunker fuel, but not all forms of fuels.

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