The new ship fuel regulations coming into force at the start of 2020 are set to create an initial confusion on the refining market and crude oil and oil product trade flows, analysts and industry experts say.
We are now just 14 months away from January 1, 2020—the start date which the International Maritime Organization (IMO) has set for the new rules on using only 0.5-percent or lower sulfur fuel oil on ships, unless said ships have installed the so-called scrubbers—systems that remove sulfur from exhaust gas emitted by bunkers.
Analysts, experts, and industry representatives are divided as to how great of an impact those new rules will be and whether there will be enough middle distillates—which include diesel and the lower sulfur marine gasoil—to meet demand for both land use, in road transportation, agricultural machinery and industry, and for use on ships at sea.
One way to comply with the IMO rules is to have scrubbers installed, which requires upfront costs, but later these would pay off with the expected much lower price of high-sulfur fuel oil.
The other way is using fuel that contains 0.5 percent sulfur. These fuels are basically in the same middle distillate product category like road diesel or jet fuel.
Some analysts have started to warn that the competition for those middle distillates could lead to shortages of diesel, resulting in price spikes. The other camp says that with diesel demand slowing in Europe and possibly reaching plateau in demand in China, there will be enough middle distillates around.
Amid expectations of fuel prices spikes in a presidential election year, the Trump Administration is seeking to slow down the 2020 introduction of the new ship fuel rules. The Administration wants a phased-in rollout in order to “mitigate the impact of precipitous fuel-cost increases on consumers,” the White House said in an email to The Wall Street Journal last week.
The United States—alongside some shipping organizations and Bahamas, Liberia, Panama, and the Marshall Islands—proposed to the IMO this week an “experience-building phase,” but the IMO’s Marine Environment Protection Committee (MEPC) rejected the idea on Wednesday, calling it vague, and invited the group to submit concrete proposals for a May 2019 meeting.
The U.S. will be seeking a “pragmatic” approach and will look to draft proposals with like-minded countries for the May meeting, Rear Admiral John Nadeau, assistant commandant for prevention policy for the U.S. Coast Guard, told Reuters on Thursday.
While the U.S. and shipping organizations will be looking to make some eleventh-hour changes to the regulation rollout, refiners, traders, and analysts are trying to estimate the impact of the new rules on the crude oil and oil product markets.
Diesel demand will be boosted, refiners said at the S&P Global Platts European Refining Summit last month.
Demand for diesel and low-sulfur fuel oil is expected to increase by 1.6 million bpd, Christof Ruhl, global head of research at the Abu Dhabi Investment Authority, said, noting that higher demand will also lift refining margins.
Chris Midgley, head of S&P Global Platts Analytics, thinks that this will be one of the most disruptive changes ever in refining and shipping and will have a global impact of more than US$1 trillion over five years.
Tor Martin Anfinnsen, Senior Vice President, Marketing and Trading at Equinor, expects increased market volatility and is concerned about diesel supply and diesel prices.
But Alex Beard, head of oil at Glencore, told Reuters earlier this month that “Distillates will clearly play a very large role in shipping but what is becoming clear is that the world can cope, so it won’t be the crisis that people were thinking a year or two ago.”
Torbjörn Törnqvist, CEO at another big trading house, Gunvor, said that the new rules will certainly create an initial confusion, but in the end the big overall winner from IMO will be the United States.
“The big winner in the IMO is actually the United States. They have the most advanced refining system in the world and will take advantage of importing more heavy crude oil and they will export light crude oil that will get a bigger premium,” Törnqvist told the Oil & Money conference in London earlier this month.