The oil market is grappling with a lot of uncertainties in both supply and demand side factors, but one certainty sure to affect oil markets, refiners, and price differentials is just around the corner—the new regulations limiting the use of sulfur-heavy fuels in shipping.
Market observers and analysts believe that in a year and a half-two, the oil and refining markets will have adapted to the new regulations, but some say there will be shocks just ahead and right after the starting date of the implementation of the new rules, January 1, 2020.
Some experts and media have dubbed the new shipping fuel rules as the “single largest oil market disruptor” set to send shockwaves through the entire supply chain in the shipping industry—from crude oil producers, to refiners, to traders, to shippers, to end-consumers of everything traded on ships.
The shipping industry is preparing for a disruption of the types of fuels it will be using as of the beginning of 2020, but the oil and fuels market, as well as refiners, are also getting ready for the impact.
According to the new rules by the International Maritime Organization (IMO), only 0.5-percent or lower sulfur fuel oil should be used on ships beginning January 1, 2020, unless said ships have installed the so-called scrubbers—systems that remove sulfur from exhaust gas emitted by bunkers.
The fuels market will offer arbitrage opportunities because the price spread between high-sulfur fuel oil (HSFO) and low-sulfur fuel oil (LSFO) will widen, Aftab Saleem, director at KPMG’s risk analytics advisory, tells Senior Forbes Contributor Dipka Bhambhani.
In addition, increased demand for very low-sulfur fuel oil (VLSFO) will boost demand for sweet crude grades, according to Saleem. The International Energy Agency (IEA) estimates that demand for HSFO will drop from 3.5 million bpd to 1.4 million bpd in just one year. By the end of 2020, an estimated 4,000 vessels—out of a global fleet of around 90,000—will have scrubbers installed which will consume some 700,000 bpd of fuel oil.
Due to the new rules, gasoil’s price differential to crude oil will be stronger while the HSFO spread will weaken, Wood Mackenzie’s Research Director Sushant Gupta said in May.
“So heavier and high sulphur or sour crudes such as Dubai and Maya which produce more HSFO will depreciate in value and lighter and low sulphur crude such as Bonny Light will appreciate in value in the early 2020s,” Gupta added.
In terms of individual oil-producing nations, the first impression is that the impact on the largest sour crude producers—Saudi Arabia, Russia, and Iraq—could be quite significant, WoodMac’s research director Angus Rodger says.
“However, it is not as simple as many of these NOCs can use their equity refinery capacity to mitigate the effects. These countries are also some of the lowest cost global producers, and so while there may be some revenue impact, it will not be enough to directly influence field breakevens or output,” Rodger noted.
Among other producers, WoodMac is concerned that Canada could be badly hit because of its heavy oil sands output, while Brazil and the U.S. would be winners because of their large production of heavy-sweet and light-sweet crudes, respectively, Rodger said in early May.
But an increasingly tighter supply of heavy crude globally—with the U.S. sanctions on Venezuela and Iran—could help Canada’s oil industry weather the unfavorable effects of the so-called IMO 2020 rules, some analysts believe. In terms of impact on crude oil prices, the U.S. EIA said in March it assumes that “IMO regulations put about $2.50/b of upward pressure on Brent crude oil prices as a result of higher demand for light-sweet crude oils. However, EIA expects broader global crude oil market conditions to have more significant effects on Brent prices than IMO regulations.”
In refining, analysts and executives believe that U.S. refiners will be the big winners of the new rules, while American Fuel & Petrochemical Manufacturers (AFPM) says the industry has invested more than US$100 billion over the past decade to make refineries capable of producing cleaner fuels.
“With an abundance of light, sweet crude and the most complex refinery system in the world that can generate low sulfur, IMO-compliant fuel more efficiently, the U.S. energy industry is prepared to supply the market with feedstock and fuel come January 1,” AFPM says.