Middle East Conflict Briefly Makes Biodiesel the Cheapest Bunker Fuel

The turmoil in global energy markets triggered by the conflict in the Middle East produced an unexpected outcome in the marine fuels market: biodiesel briefly became the cheapest bunker option in Rotterdam once European carbon costs were factored in. This is according to a new white paper produced by energy pricing specialist General Index together with the London Stock Exchange Group (LSEG).

According to the study, B30, a blend of 30% used cooking oil methyl ester (UCOME) and 70% VLSFO, was $74.61 per tonne cheaper than conventional VLSFO in April. In the previous three months, B30 had been between $11 and $27 per tonne more expensive than VLSFO under the same calculation, which includes EU ETS emission allowances and potential FuelEU Maritime penalties. The researchers also found that B100 UCOME, once carbon costs were included, traded at a discount to marine gasoil (MGO) for eight weeks between March and May.

The shift occurred following the closure of the Strait of Hormuz, which sent fossil fuel prices soaring: between February and March, the average price of European gasoil rose by $476 per tonne, while UCOME increased by just $65. The report, titled 'Lessons From Hormuz: Disruptions For Renewable Fuel Cost Competitiveness' and authored by General Index's lead analyst David Elward and LSEG's senior analyst Tim Deehan, argues that carbon pricing is beginning to show its effectiveness in making renewable marine fuels competitive.

The study also compared the performance of other renewable fuels: while conventional biodiesels proved relatively resilient, hydrotreated vegetable oil and sustainable aviation fuel (SAF) rose sharply alongside their fossil equivalents, with SAF increasing by $636 per tonne between February and March despite having little reliance on the supply chain affected by the Hormuz disruption. The authors estimate that aviation would need carbon prices of around $445 per tonne of CO2 equivalent, nearly five times current levels, to close the gap between SAF and conventional jet fuel. However, they caution that this should not be read as a permanent shift, since biofuels remain generally more expensive than conventional bunkers before carbon costs are taken into account.

At the same time, the Middle East conflict is also fragmenting the global marine fuels market, according to Bloomberg. Disruptions near the Strait of Hormuz and the Red Sea are forcing longer diversions via Africa and the Atlantic, turning ports such as Port Louis in Mauritius, South Africa, West Africa, Brazil, Sri Lanka and Pakistan into new bunkering hubs, while Singapore continues to grow and Fujairah loses demand. Executives from companies such as Stolt-Nielsen, TFG Marine and Hafnia noted that shipowners can no longer treat bunkering as a routine last-minute decision and are now sourcing fuel further in advance, in smaller volumes, with greater control over quality and availability.