Esa Ramasamy - S&P Global Platts
Beginning Jan 1, 2020, the cap on sulfur emissions from seaborne vessels will impact locations beyond the current ECA areas (Canada, USA, North Sea, and the Baltic, along with China and Taiwan) and have a bullish impact on petroleum products required to produce IMO compliant fuels. An estimated 3.7 million b/d 3.5% sulfur fuel oil bunker fuel is to be backed out of the bunker market.
There is a lot of literature in the market that says anything that is high sulfur is going to experience an extended stretch of bearishness. The reality, however, is not so straight forward.
HSFO 380 CST 3.5% bunker fuel will be most affected by IMO 2020, where it will back out an estimated 3-million b/d of 3.5% bunker fuel, which will be displaced by a variety of combinations of gasoil (diesel) and LSFO. About 500,000 b/d or slightly more of this 380 CST 3.5% will be taken by ships with scrubbers.
As far as straight-run HSFO and VDU bottoms are concerned, there will be a market for those products and this is why HSFO remains relatively strong compared to bunker fuel spreads.
Sour crudes: they are not likely to suffer the same consequence as that of 380 CST 3.5% bunker fuels because the OPEC output cuts and because sanctions on Iran and Venezuela have removed about 5-million b/d of medium/heavy sour crudes from the supply chain. This has tightened the market for sour crudes. Secondly, refineries built in that last 20 years have been based on a medium sour crude – which means they will have secondary processing capacity – so these refiners will continue to utilize sour crudes in support of their secondary capacity.
What will determine the real impact of IMO 2020 will be the price movements of 0.5% Marine Fuels (IMO 2020 compliant fuel), high sulfur fuel oil and diesel. There is data to show that prices between 0.5% Marine Fuels and HSFO is beginning to widen. It is also an indication that diesel prices will turn bullish. It is estimated that there is a need for an additional 2.2 million b/d diesel fuel to convert some of the HSFO into IMO 2020 compliant fuel, which is expected to lift diesel prices come 2020.
In conclusion, prices for fuel oil and diesel will determine how refiners react to IMO 2020 regulations. Refineries with cokers and FCCs are expected to run hard to meet the surge in demand for diesel and is expected to lead to increased demand for medium/heavy crudes.