Source: International Maritime Organization.
From 1 January 2020, the International Maritime Organization ((IMO)) will limit the sulfur in fuel oil used on board ships operating outside designated emission control areas to 0.50% m/m (mass by mass), from 3.50% m/m. Of total global air emissions, shipping accounts for 9 percent of the sulfur oxides.
Grave expectations of the impact on the oil market have been published in advance of this event, but it appears that an Asian gasoline glut may in fact ease the transition after all.
In Our View: $200 Oil and the Economic Collapse of 2020, well-known oil economist Phillip K. Verleger, Jr., wrote in July 2018 about the impact of IMO 2020:
The global economy will face collapse in twelve to eighteen months, a downturn worse than the Great Recession of 2008. What’s coming could even rival the Great Depression of the 1930s. Catastrophically high oil prices will cause the impending recession. The world oil market will see prices triple or quadruple in the next eighteen months—$300 crude is possible. US voters may go to the polls in 2020 with gasoline and diesel selling for more than $10 per gallon.…the IMO rule could create the worst economic catastrophe of the last one hundred twenty years.”
Earlier this year or late 2018, Enerjen Capital wrote:
Up to 3.7mb/d of high sulphur fuel demand will disappear and the increased diesel demand from shippers (on top of base global demand growth) implies a potential 1-1.5mb/d deficit.
Given limited refinery capacity to produce low sulphur fuels, we could see a dramatic increase in diesel prices starting 4Q19.
With global oil demand growing over +1.3mb/d YoY, and factoring in higher IMO 2020 low-sulphur products demand, there will be insufficient supply to prevent a distillate-led spike in late 2019 and into 2020.”
Thus far, there has been no evidence of a distillate-led price spike in the second half of 2019.
And the forward curve for heating oil futures prices, a middle distillate, shows no spike coming.
Instead, it would appear these predictions were based on false assumptions of how the global refining industry would respond to the challenge of supplying IMO 2020-complaint fuels.
IMO 2020 Compliant Fuels
Singapore is by far the largest bunker fuel supplier in the world. The Maritime and Port Authority of Singapore ((MPA)) has published a list of licensed bunker suppliers that are able to provide IMO 2020 compliant fuels in Singapore.
The list comprises 49 accredited Singapore bunker suppliers that can offer bunker fuels with sulphur content of no more than 0.5%. The 49 Singapore fuel suppliers can offer fuel grades ranging from MGO, low sulphur fuel oil, ultra low sulphur fuel oil of 0.1% and the 3.5% heavy bunker fuel oil. Suppliers include big players such as BP Singapore, ExxonMobil Asia Pacific, Shell Eastern Petroleum, Total Marine Fuels, and Chevron Singapore.
Low Sulphur Fuel Oil (LSFO) is not a distillate, it is a high sulfur bunker fuel (resid) which has had its sulfur reduced at the refinery. About 33 suppliers on the list can either offer the product or will have it before 2020.
Separately, Genoil Inc. (OTCPK:GNOLF), the publicly traded clean technology engineering company for the energy industry, created the Genoil’s Hydroconversion Upgrader (GHU®):
its $48.00 charge per ton, including fixed investments, overhead, operating costs, and profit to the shipping industry, on a per ton basis amounts to about the operating costs of scrubbers, so that it is drastically cheaper for the shipping industry compliance."
This cost differential ($48/ton) will be far less than the difference between marine gasoil and high sulfur fuel oil, which implies that LSFO should have a cost advantage.
PBF Energy (PBF)
According to its website:
PBF is one of the largest independent petroleum refiners and suppliers of unbranded transportation fuels, heating oil, petrochemical feedstocks, lubricants and other petroleum products in the United States. PBF currently owns and operates five domestic oil refineries and related assets with a combined processing capacity, known as throughput, of approximately 900,000 bpd, and a weighted average Nelson Complexity Index of 12.2.
PBF stands to gain if distillate prices spike as a result of IMO 2020. However, PBF has lowered its outlook for ultra-low sulfur diesel (ULSD) demand associated with the change, as have other US refining peers.
Refiners have instead increasingly used vacuum gasoil (VGO) diverted from gasoline-producing fluid catalytic cracking (FCC) units to supply components for the lower sulfur marine fuel. The strategy would tie marine fuel demand to both the diesel and gasoline markets, chief executive Tom Nimbley said.
Gasoline gets sloppy, you just take gasoil out of the FCC and maybe sell it as a 0.5pc compliant fuel," Nimbley said. "I think there are going to be a number of knobs that turn and we will be supplying the fuel in different ways."
I have previously discussed that JBC Energy in Vienna believes that refiners will more likely supply very low sulfur fuel oil than marine gas oil.
Chinese Gasoline Glut
Daria Campbell, a refined products analyst at Kpler, recently told Platts that she agreed the Chinese gasoline market was oversupplied. "China's refined product glut is forcing the country to look beyond its traditional export regions to find new homes for its gasoline."
According to Platts:
Mexico's June gasoline imports from the US likely dropped year on year, while the country's imports from Asian countries reached new highs, according to preliminary data from Mexico's Energy Secretariat, a trend supported by a glut of gasoline across the Pacific in Asia.”
According to a Reuters story:
One refining official based in Seoul said their plant primarily runs high-sulphur crude oil so they take the fuel oil produced after initial refining and remove the sulphur through a residue desulphurization process. Instead of passing the feedstock through a residue fluid catalytic cracker (RFCC) to make gasoline, they are selling it as VLSFO.
This would “reduce gasoline output while increasing LSFO output so the gasoline market could recover,” the official said.
Refiners with complex refineries, such as PBF, can make a new product to meet IMO 2020 regulations, a Low Sulfur Fuel Oil (LSFO) from High Sulfur Fuel Oil (HSFO). And many are ready to supply it in Singapore.
The fuel is sold before going through the FCC unit, reducing the gasoline pool. And so IMO 2020 may have more impact on gasoline than distillate prices.
With the current glut of gasoline in the Chinese market, price incentives may very well support making the LSFO than gasoline. And so fears of a spike in distillate prices appear to have been misguided due to a lack of understanding of refinery economics and processes. Such a spike, and “the worst economic catastrophe of the last one hundred twenty years” appear to be overblown.
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