If the Price Is Right You Can Sail Away – How New Bunker Regulations Impact Fuel Oil Markets

Fuel oil demand has been declining for years on dry land – under attack by regulators anxious to reduce sulfur emissions. New international regulations introduced in January of this year are designed to further reduce sulfur emissions from ship engines burning marine fuel oil (“bunkers”)  at sea. The new regulations have had an immediate impact on the market for 1% sulfur fuel oil. Most affected ship owners are now using more marine gasoil in coastal zones. Today we examine how the new regulations have impacted fuel oil markets.

In Episode 1 we described the recent changes made to regulations governing the sulfur content of fuels used to power vessels in coastal regions of Northern Europe and North America – known as Emission Control Areas (ECAs). The new ECA regulations came into effect on January 1, 2015 and require ships to use fuels with 0.1% sulfur content or less - tightened from the previous 1% sulfur fuel oil standard. Outside the ECA zones, ships can continue to use fuel oil with up to 3.5% sulfur. It was expected by many in the market that the new regulations would cause a big increase in shipping freight costs because low sulfur fuels are more expensive. However, as luck would have it, last year’s oil price collapse coincided with the change so that fuels complying with the new ECA regulations now cost about the same as previously permitted bunker fuel oil. Most ship owners have complied with the new rules by switching to low sulfur marine gasoil (MGO) when travelling in ECA zones. A more costly compliance solution involving installing scrubbers on ship engines has been adopted by the cruise and ferry industries that make most of their journeys in ECA zones. In the future liquefied natural gas (LNG) powered engines look set to gain market share in new build vessels. In this blog we look at the impact of the new ECA regulations on the fuel oil market.

As we explained last time, fuel oil is the “residual” material left over after more valuable products have been extracted by refining crude oil. As such the value of fuel oil is often lower than raw crude and the fact that it produces high levels of sulfur and nitrogen emissions  means that it is increasingly subject to more stringent environmental regulations. The three primary markets for “residual” fuel oil are; as a feedstock for complex refineries to upgrade to more valuable products, as a fuel for heating and power generation (especially in Asia and Latin America), and as bunkers for marine fuel (see Yo Ho Ho And a Cargo of Bunkers). The worldwide fuel oil market is shrinking as cleaner alternatives such as LNG increasingly take its place for heating and power generation. The new ECA regulations place further pressure on the fuel oil market by incentivizing shippers to use alternative fuels like MGO.

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