The implementation date for IMO 2020, the international rule mandating a shift to low-sulfur marine fuel, is less than 12 months away. It’s anyone’s guess what the actual prices of Brent, West Texas Intermediate (WTI) and other benchmark crudes will be on January 1, 2020, or how much it will cost to buy IMO 2020-compliant bunker a year from now. What is predictable, though, is that the rapid ramp-up in demand for 0.5%-sulfur marine fuel is likely to affect the price relationships among various grades of crude oil, and among the wide range of refined products and refinery residues — everything from high-sulfur residual fuel oil (HSFO, or resid) to jet fuel. The refinery sector is in for an extended period of wrenching change, and today we conclude our blog series on the new bunker rule with a look at the structural pricing shifts needed to support the availability of low-sulfur marine fuel.
As we said in Part 1, the International Maritime Organization (IMO) — a specialized agency of the United Nations — for a number of years now 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 in most of the world to be reduced to a much stiffer 0.5% on January 1, 2020. [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.] Baker & O’Brien’s latest analysis of IMO 2020’s impact assumes that current global demand for high-sulfur bunker (HSB; sulfur content of up to 3.5%) is about 3.2 MMb/d, and that by 2020, demand for the new fuel pool consisting of low-sulfur bunker (LSB; 0.5% sulfur or less) and HSB would be 3.4 MMb/d, with the incremental 0.2 MMb/d of demand representing a combination of demand growth and the lower energy density/bbl of the lighter LSB blends. Six primary factors are seen as bringing the bunker market into something approaching balance over the following year or so: (1) some degree of non-compliance with IMO 2020, (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 (ditto), and (6) increased global refining throughputs (double ditto). Part 2 and Part 3 discussed those factors in some detail.
Two key bottom-line findings are that the global shipping industry will need an incremental 2 MMb/d of 0.5%-sulfur bunker come January 1, 2020, and that the worldwide demand for HSB (and the high-sulfur resid used to make it) will plummet. These big demand shifts will have significant effects on the demand for — and relative prices of — various grades of crude oil, lower-sulfur refined products used to make IMO 2020-compliant bunker, and higher-sulfur refined products and refinery residues.
To access the remainder of The Thunder Rolls, Part 4 - IMO 2020's Effect on Prices for Crude, Refined Products and Refinery Residue you must be logged as a RBN Backstage Pass™ subscriber.
Full access to the RBN Energy blog archive which includes any posting more than 5 days old is available only to RBN Backstage Pass™ subscribers. In addition to blog archive access, RBN Backstage Pass™ resources include Drill-Down Reports, Spotlight Reports, Spotcheck Indicators, Market Fundamentals Webcasts, Get-Togethers and more. If you have already purchased a subscription, be sure you are logged in For additional help or information, contact us at email@example.com or 888-613-8874.