Just Can't Get Enough, Part 2 - Fuel Oil Spreads Extend IMO 2020 Scrubber Payout Times

Some shipowners plan to comply with the IMO 2020 deadlines for limiting sulfur in ship emissions by installing scrubber devices to clean the exhaust generated by burning less expensive high-sulfur bunker fuel. For many, this may work out to be more economical, at least in the interim, than using more costly IMO 2020-compliant fuel with sulfur content of no more than 0.5% or converting the vessel to run on an altogether different fuel such as liquefied natural gas. However, narrowing “sulfur spreads” this year have put that compliance strategy at risk by tripling the time it would take for shipowners to recoup their scrubber investments. Today, we continue an analysis of the changing economics of scrubber installation in the run-up to IMO 2020.

This blog is based on analysis originally published by Morningstar Commodities and Energy Research. You can download a copy here.

The regulations coming into force in January 2020 are set to dramatically alter demand for high-sulfur fuel oil and in the process upset refinery economics around the globe. The impending IMO 2020 mandates are the culmination of a series of standards set in motion in October 2008. The regulation leaves shippers to either face the higher costs of using low-sulfur fuel or install expensive scrubber technology to mitigate the emissions of high-sulfur (but lower-cost) fuel. As a result, the market last year was taking a bearish view of heavy (high-sulfur) fuel oil prices, with the forward curve at the time reflecting lower prices. The shortage of heavy crude this year has reversed that expectation, throwing a curve ball at the economics of installing scrubber technology. Recent concerns with the open loop waste disposal method that most scrubbers use have also increased fears that the technology could be subject to new regulation going forward.

As we detailed last month in Part 1, despite expectations to the contrary, the price premium for clean-burning 0.5%-sulfur marine fuel oil over high-sulfur 380 centistokes (CST) bunker fuel at the U.S. Gulf Coast declined steadily from nearly $11/bbl in early January to less than $2/bbl during the first week of March and was just over $6/bbl on March 27, according to Platts data. (Centistokes is a measure of viscosity; see Yo Ho Ho and a Cargo of Bunkers for more on fuel grades.) Last year, the impending IMO 2020 regulation widened the spread between low- and higher-sulfur marine bunkers as traders bet that demand for high-sulfur fuels would evaporate in the months preceding the implementation of IMO 2020 this coming January 1. This year, fundamental and geopolitical circumstances have shifted, increasing the value of heavy, high-sulfur crude grades versus light sweet alternatives. That reversal occurred in large part because of a shortage of heavy crude that Gulf Coast refineries are configured to process; the primary culprits were OPEC production cuts and lower output from Venezuela and Iran. The question before us today is, what does that market curveball mean for shipowners investing in scrubbers?

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