From January 2020 the International Maritime Organization has imposed the largest reduction in the Sulphur contained in fuel consumed by shippers. The forthcoming measures are set to impose shipping vessels a maximum content of fuel equal to 0.5%, an enormous shifting compared to the current 3,5 wt%. The implementation is a result of a recommendation proposed by a subcommittee more than a decade ago at the United Nations, designing rules for shipping security and pollution.
After postponing for several years, IMO has finally set 2020 as the date for the regulation implementation with the specific aim of reducing the emission of dioxide, resulting in acid rain and environmental damage for vegetation and wildlife, and contributing to the acidifications of the oceans.
The marine sector has been responsible for half of the global fuel oil demand, with consumption of 3,8 million barrels per day. Therefore, it’s normal to question how this regulation will impact the demand for oil and the fuel commodity market.
The reduction of the sulfur emissions by ship owners can be achieved by using low-sulfur oil, installing scrubbers, which will allow extracting the Sulphur during the High Sulphur burning, or by traveling more slowly. The installation of exhaust gas cleaning systems, consenting to continue with the use of heavy oil, or the purchasing of clean, and more expensive, fuels, known as MGO, are going to cause an increase in the costs for the ship owners. These expenses are leading to the reticence of the shippers to adapting to the 2020 implementation, taking into account the structural downturn of the marine sector and the consequent lack of a capital expenditure requirement.
Steve Sawyer, a senior analyst at energy consultant Facts Global Energy, has defined the measures implemented as “the biggest change in the oil market history”, enhancing how IMO 2020 will affect not only oil producers, and refiners but also ship owners, traders, equity, investors, insurance companies, logistical businesses.
The higher diesel will cause global inflation and have bad consequences over the shipping costs, which will be likely passed on the consumers, and also over the traded goods. In terms of traded goods, it’s remarkable that as shippers may moderate the speed to economize on fuel, perishable goods will be noticeably impacted by the implementation.
The estimations are forecasting additional costs of approximately $10 billion faced by the container industry to fall in line with the IMO implementation. For instance, A.P. Moller-Maersk and MSC, the biggest container companies worldwide, will incur extra costs of roughly $2 billion each.
The forthcoming measures are expected to create a boost in the demand for low Sulphur fuel and a surplus of high Sulphur fuel. Oil as a commodity is always traded on demand and supply, and the basic assumption made is that each barrel of crude is related to an oil-based product on a ratio of 1:1. It is noticeable that the growth of distillate demand will cause a potentially very strong demand for crude oil: one barrel of distillate is produced starting from two barrels of crude.
Normalized growth is predicted for 2021/2022, after an artificially high demand for crude oil, being the result of an increase of the demand from ships. It is predicted that US oil producers will largely benefit from an increase in the demand from Europe and Asia, while producers of extra light and sour crude will be impacted negatively.
Uncertainty regarding what will happen in the market is growing as 2020 creeps nearer. From June 2019 the High sulfur fuel oil – HSFO- price in Singapore has grown by 45%.
Singapore’s ports are known to store MGO LS, with the consequent lower supply of it contributing to the price’s fluctuation. The usual pricing mechanism, which allows analyzing market fundamentals, is being replaced by speculation and general fears that leave possible only to construct possible scenarios of IMO 2020 Sulphur Cap scenarios.
BIMCO, the Baltic and international shipping associations, has marked three possible scenarios enlightening the differences between the price of High-sulfur fuel oil and marine gas oil – MGO – consisting exclusively of distillates. A plausible convergence between HSFO price and MGO will consent a smooth transition, being certain of an industry adequately prepared that will face a potential loss of irrelevant significance in the short term. Reaching a status quo would translate, according to BIMCO assumptions, in a bumpy transition with a decrease of HSFO price contra-posing to an increase of MGO’s ones. Taking into consideration the market implications of the second scenario considered they will include a medium-term disruption of the market conditions. A long-term disruption is proposed as the third scenario, characterized by a striking difference between HSFO and MGO’s prices. Potential bankruptcies of fuel companies in distress are not excluded.
The overall uncertainty reigning over the oil market must include other geopolitical events, including the trade war between China and the USA and the expected cut of production of OPEC forecasted for December 2020. According to Bank of America’s latest report, the hype of a spike in oil and diesel price is dissipating, quickly counterbalanced by the escalating trade war.
Gaeta Greis
After postponing for several years, IMO has finally set 2020 as the date for the regulation implementation with the specific aim of reducing the emission of dioxide, resulting in acid rain and environmental damage for vegetation and wildlife, and contributing to the acidifications of the oceans.
The marine sector has been responsible for half of the global fuel oil demand, with consumption of 3,8 million barrels per day. Therefore, it’s normal to question how this regulation will impact the demand for oil and the fuel commodity market.
The reduction of the sulfur emissions by ship owners can be achieved by using low-sulfur oil, installing scrubbers, which will allow extracting the Sulphur during the High Sulphur burning, or by traveling more slowly. The installation of exhaust gas cleaning systems, consenting to continue with the use of heavy oil, or the purchasing of clean, and more expensive, fuels, known as MGO, are going to cause an increase in the costs for the ship owners. These expenses are leading to the reticence of the shippers to adapting to the 2020 implementation, taking into account the structural downturn of the marine sector and the consequent lack of a capital expenditure requirement.
Steve Sawyer, a senior analyst at energy consultant Facts Global Energy, has defined the measures implemented as “the biggest change in the oil market history”, enhancing how IMO 2020 will affect not only oil producers, and refiners but also ship owners, traders, equity, investors, insurance companies, logistical businesses.
The higher diesel will cause global inflation and have bad consequences over the shipping costs, which will be likely passed on the consumers, and also over the traded goods. In terms of traded goods, it’s remarkable that as shippers may moderate the speed to economize on fuel, perishable goods will be noticeably impacted by the implementation.
The estimations are forecasting additional costs of approximately $10 billion faced by the container industry to fall in line with the IMO implementation. For instance, A.P. Moller-Maersk and MSC, the biggest container companies worldwide, will incur extra costs of roughly $2 billion each.
The forthcoming measures are expected to create a boost in the demand for low Sulphur fuel and a surplus of high Sulphur fuel. Oil as a commodity is always traded on demand and supply, and the basic assumption made is that each barrel of crude is related to an oil-based product on a ratio of 1:1. It is noticeable that the growth of distillate demand will cause a potentially very strong demand for crude oil: one barrel of distillate is produced starting from two barrels of crude.
Normalized growth is predicted for 2021/2022, after an artificially high demand for crude oil, being the result of an increase of the demand from ships. It is predicted that US oil producers will largely benefit from an increase in the demand from Europe and Asia, while producers of extra light and sour crude will be impacted negatively.
Uncertainty regarding what will happen in the market is growing as 2020 creeps nearer. From June 2019 the High sulfur fuel oil – HSFO- price in Singapore has grown by 45%.
Singapore’s ports are known to store MGO LS, with the consequent lower supply of it contributing to the price’s fluctuation. The usual pricing mechanism, which allows analyzing market fundamentals, is being replaced by speculation and general fears that leave possible only to construct possible scenarios of IMO 2020 Sulphur Cap scenarios.
BIMCO, the Baltic and international shipping associations, has marked three possible scenarios enlightening the differences between the price of High-sulfur fuel oil and marine gas oil – MGO – consisting exclusively of distillates. A plausible convergence between HSFO price and MGO will consent a smooth transition, being certain of an industry adequately prepared that will face a potential loss of irrelevant significance in the short term. Reaching a status quo would translate, according to BIMCO assumptions, in a bumpy transition with a decrease of HSFO price contra-posing to an increase of MGO’s ones. Taking into consideration the market implications of the second scenario considered they will include a medium-term disruption of the market conditions. A long-term disruption is proposed as the third scenario, characterized by a striking difference between HSFO and MGO’s prices. Potential bankruptcies of fuel companies in distress are not excluded.
The overall uncertainty reigning over the oil market must include other geopolitical events, including the trade war between China and the USA and the expected cut of production of OPEC forecasted for December 2020. According to Bank of America’s latest report, the hype of a spike in oil and diesel price is dissipating, quickly counterbalanced by the escalating trade war.
Gaeta Greis