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Glory Days - Is IMO 2020's Relevance for Crude Oil Markets Making a Comeback?

Way back in 2019, just about everyone in the refining world was talking about IMO 2020, the International Maritime Organization’s soon-to-be-implemented rule requiring much lower sulfur emissions from most ocean-going ships. A lot of forecasters were anticipating that major market dislocations would result — things like $50/bbl-plus diesel crack spreads, oversupply of high-sulfur fuel oil, and ultra-wide differentials between light and heavy crude oils. They did, but only briefly, in the last few months of 2019. The implementation of IMO 2020 turned out to be pretty much a non-event, and for much of 2020 and 2021, people didn’t think much about the new bunker fuel rule. Lately, things have been changing, as we discuss in today’s RBN blog.

Beginning January 1, 2020, the International Maritime Organization (IMO) mandated that most ships powered by fuel oil (the most common bunker fuel) use products containing less than 0.5% sulfur (S) by weight, a significant reduction from the previous specification of 3.5% S by weight. (An alternative for shipping companies is sticking with high-sulfur fuel oil and installing an onboard “scrubber” to remove most of the sulfur from the ship’s exhaust stack.) This new rule is colloquially referred to as “IMO 2020.” (For a more detailed description of IMO 2020 and its implementation, refer to our December 2019 blog, All Around the World.)

Old-school, 3.5% S fuel oil is produced from the heaviest part of a barrel of crude oil: the vacuum column residual material — a.k.a. “vacuum resid” — that’s left over when a refinery has run crude through its atmospheric and vacuum distillation towers. It’s very difficult to remove sulfur from vacuum resid (via a hydrotreating process), so a “cracking refinery” (one without a coker and other equipment to break down the vacuum resid into middle distillates and other valuable products) must sell its resid either into the bunker fuel or asphalt markets or to coking refineries “as-is” for use as an intermediate feedstock. In contrast, IMO 2020-compliant 0.5% S fuel oil can be produced by running a sweet (low-sulfur) crude slate through a cracking refinery to produce vacuum resid that is similarly low in sulfur. In other words, lower-sulfur crude oil makes low-sulfur resid. (Another option is diluting the vacuum resid with large volumes of diesel, but there are flashpoint, compatibility and viscosity concerns that may limit the amount of diesel that can be blended into bunker fuels — a nuanced topic for another day.)

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