Before looking at the question of how this might impact market prices of the various fuel types, there is a further higher order question to address, which, to a certain extent, is proving to be something of a ‘game of chicken’ on between the refiners and the marine industry in terms of investment to meet the new rules. As noted above, installing ‘scrubbers’ is very much the quick fix, which would sustain a higher level of demand for HSFO than a wholesale switch to LSFO, and by extension allow refiners (and port authorities) a longer lead iIn time for investment in equipment, and, where necessary, facilities, to refine and store LSFO. Given that upfront investment for all concerned will be high, and possibly very difficult to recoup in the short-term, it is little wonder that both sides are taking a ‘wait and see’ attitude to what other stakeholders will do. But with the 1 January 1, 2020 deadline already looming very clearly in the headlights, the scope for considerable volatility in market prices for related products, regardless of what happens to crude oil prices, now looks to be very high.

According to a Wood Mackenzie estimate, compliance with the new IMO regulations is anticipated to be around 80% in 2020, and by extension that implies that a drop of ca. 2.0 million bpd in HSFO demand from the bunker sector. Leaving aside the observation that refiners have traditionally seen the bunker fuel market as a ‘sink’ to dump residual high sulfur material, thus eschewing the need to avoid the investment in much higher cost upgrading and hydro-treating facilities, the question is what happens to the excess HSFO. As with anything, there are alternatives of course, it could be re-blended to produce VLSFO (very low sulphur fuel oil), but such VSLFO would need to be priced at a premium to crude oil, rather than the discount that applies to HSFO, in order to be economical. Alternatively it could be processed within the world’s extant spare residue upgrading capacity, though this would imply a bigger discount to crude prices in order to make using such spare capacity viable in business terms. The same Wood

Mackenzie study also assumes that the demand for marine gas oil will rise by ca. 1.0 Mln bpd, which by extension implies that its current premium to crude prices would need to rise, both due to the fact that its production requires higher refinery utilization, as well as to compensate for the revenue shortfalls from lower HSFO prices. Again by implication such a shift in the prices of refined products also suggests that there will be a shift in crude oil differentials, primarily assumed to involve a substantial widening in the discounts for sour and heavy crude grades to Brent, as well a perhaps less obvious shift in sweet/sour crude differentials.

While this article only scratches the surface of the complex economic interactions involved, it should be obvious that considerable disruption is on the horizon for all of the stakeholders. In the very near term, the primary risk is that refiners reduce stocks of high sulfur fuels in anticipation of 2020, potentially rather too quickly. The latest reported drop in Singapore fuel oil inventories has taken them down to their lowest levels since 2009, in other words back to levels not seen since the maximum disruption point to global trade as a consequence of the global financial crisis.

Marc Ostwald E: T: +44(0) 20 7716 8534


13 | ADMISI - The Ghost In The Machine | September/October 2018

Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32  |  Page 33  |  Page 34  |  Page 35  |  Page 36