oil tankerReuters

  • One of the oil industry’s most-maligned products, high sulfur fuel oil, is a rare success story during the commodity’s record-breaking slump during the coronavirus pandemic, Bloomberg reported Thursday.
  • HSFO is generally only used in industrial uses like in power plants and to power ships.
  • HSFO, as it is known, has steadily seen its price increase since the beginning of the crisis as oil refineries shutter production of oil, lessening its supply.
  • HSFO prices had tanked since last summer when a new set of rules from the International Maritime Organization, which effectively banned ships from using HSFO, was announced.
  • On Thursday, the gap between the price of HSFO and crude oil was around $35 per barrel. In November 2019, the gap was as big as $85 per barrel.
  • Watch crude oil trade live on Markets Insider.

At a time when oil demand has been ravaged by the COVID-19 pandemic, one much-maligned corner of the industry is thriving, Bloomberg reported Thursday.

Prices for high-sulfur fuel oil (HSFO) have jumped to their highest level in nine months relative to the price of crude oil, the news agency reported, as supply of the fuel — which is generally only used in industrial uses like in power plants and on container ships — drops.

The supply level has dropped, Bloomberg reported, because refineries are producing less crude overall, which is in turn lessening the amount of HSFO. 

HSFO is a form of oil that is, as its name suggests, high in sulfur, making it less desirable for use in things like automotive and aviation fuels. It is also particularly bad for the environment, and can cause respiratory problems in people. Bloomberg described it as “oil’s worst product.”

Coronavirus has brought a halt in air travel, pushed every major economy into lockdown and greatly battered the demand for gasoline and jet fuel. 

“Fuel oil supply has gone down because of the run cuts caused by the pandemic,” Steve Sawyer, director of refining at Facts Global Energy, told Bloomberg.

Prices for HSFO had plunged last year in anticipation of a new set of rules from the International Maritime Organization, which effectively banned using the fuel to power ships, removing one of its only real uses.

The rules, known as IMO 2020, kicked in on January 1 this year, and mean fuel used on ships is allowed to have a maximum content of 0.5% of sulfur mass-by-mass down from 3.5% previously. HSFO generally has a sulfur content of over 1%.

Those rules sent margins on HSFO down to as low as -$30 per barrel in November 2019. At the same time, US crude oil was worth around $55 per barrel. 

But the gap between both is now shrinking, falling from around $85 in November, to $35 now.

As of Thursday, Bloomberg reported, HSFO margins are at around -$7.80 per barrel, compared to a price of around $28 per barrel for crude. The last time HSFO was at such a price level was in July 2019, Bloomberg added.

Read more: 10 big money managers shared with us their favorite hidden gems in the market, and the contrarian trades they’re making amid the pandemic. 

The price of US oil, West Texas Intermediate, turned negative for the first time in history almost a month ago and Brent, the international benchmark, touched a two year low in part due to low demand for fuel as the pandemic has tanked economic activity, and due to lack of storage options, particularly at a key hub, in Cushing Oklahoma 

Prices have recovered since, but fears are mounting that the WTI June contract could also turn negative next week, especially after a US regulator warned traders on Thursday to brace for negative prices again. 

The oil volatility has come despite efforts by the OPEC and its allies to reduce production. After a bitter price war between Saudi Arabia and Russia the Consortium reached an arrangement last month to cut production by 9.7 million barrels per day in May and June. 

Read more: Todd Ahlsten has dominated the market and his competitors for 2 decades. He lays out the 6 stock-picking decisions that reshaped his portfolio after the coronavirus meltdown.

Future OPEC cuts could reduce medium to sour crudes, which typically display higher sulfur content. This could continue to keep supply of HFSO limited and support its price.