Last year, the impending implementation of International Maritime Organization’s rule mandating the use of lower-sulfur marine fuels starting January 1, 2020, widened the price spread between rule-compliant 0.5%-sulfur bunker and the 3.5%-sulfur marine fuel that has been a shipping industry mainstay. Traders’ thinking was that demand for high-sulfur bunker would evaporate in the run-up to IMO 2020, as the new rule is known. But since early January, the spread between low- and high-sulfur fuel at the Gulf Coast has narrowed from nearly $11/bbl to less than $2/bbl. The culprit is a shortage of heavy-sour crude caused by a number of factors. Today, we begin a two-part series on low-sulfur vs. high-sulfur fuel and crude values as IMO 2020 approaches.
This blog is based on analysis originally published by Morningstar Commodities and Energy Research. You can download a copy here.
Given IMO 2020’s broad implications — not only for the shipping industry but for crude oil producers and refineries — it’s natural that the rule would be a frequent topic in RBN blogs. Most recently, in our four-part The Thunder Rolls series, we noted that the IMO — a specialized agency of the United Nations — for a number of years has been ratcheting down allowable sulfur-oxide emissions from the engines that power the 50,000-plus tankers, dry bulkers, container ships and other commercial vessels plying international waters. IMO 2020, the agency’s latest rule, calls for the current 3.5% cap on sulfur content in bunker fuel in most of the world to be reduced to a much stiffer 0.5% nine-plus months from now. [There is an even tougher 0.1%-sulfur limit already in place in the IMO’s Emission Control Areas (ECAs), which include Europe’s Baltic and North seas and areas within 200 nautical miles of the U.S. and Canadian coasts.] We also looked at the six primary factors seen as bringing the marine fuel market into something approaching a balance as IMO 2020 kicks in: (1) some degree of non-compliance with the rule, (2) on-ship “scrubbers” to capture sulfur-oxide emissions, (3) blending of existing low-sulfur fuel oil with distillate to make rule-compliant marine fuel, (4) refinery upgrades (to produce more low-sulfur products), (5) shifts in crude slates and crude oil flows, and (6) increased global refining throughputs.
The impact of IMO 2020 will be enormous: industry reports suggest the new rule will require as much as 3 MMb/d of high-sulfur bunker fuel oil to be replaced by low-sulfur alternatives. According to the International Energy Agency's 2018 five-year oil market outlook, about 30% of the new demand for IMO 2020-compliant marine fuel will be met by marine gasoil, a middle distillate designed for ship engines, and another 30% will be met by new 0.5%-sulfur fuel oil blends created from existing 1%-or-less low-sulfur fuels and middle distillates such as ultra-low-sulfur diesel. The remaining 40% of the bunker market is expected to continue using existing high-sulfur fuel blends. Some vessels will use specially installed scrubbers that treat emissions to remove sulfur and other toxins from engine exhaust. A very small number of vessels will be fitted or built to use liquefied natural gas (LNG). As we noted above, others will simply not comply with the new rule, at least initially, taking the risk that policing on the high seas will be difficult.
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