Seen and heard at IP Week: shipping is at the top of the crude traders' agenda
It is International Petroleum (IP) Week in London, an opportunity to mix with those who trade the cargoes on which the tanker fleet depends and, at one event, talk at the mixer offered a surprising viewpoint about mixing fuel.
At the Tanker Freight Derivatives Forum, hosted by the Baltic Exchange and the Forward Freight Agreement (FFA) Brokers Association, I heard how those who trade in the derivatives of tanker freight assess the price of a marine fuel that is not yet available.
The FFA brokers spoke of deep concerns over the pricing of IMO 2020 low sulphur fuel. Some brokers had experimented with using a ratio of prices between heavy fuel oil and distillates to give a forward curve that could be fed into the freight calculations. A very wide range of ratios was discussed.
Furthermore, it would appear that there is still some work to do on the flat fuel rate that will be applied to Worldscale. Options include Worldscale using a high sulphur fuel oil (HSFO) flat rate or the HSFO rate plus a compliant fuel flat rate.
However the biggest surprise came from a discussion about the extraordinary impact IMO's decision to impose a sulphur cap on marine fuel is having across the crude oil market.
According to ICE Futures Europe’s director of market development Mike Davis, there is a “perfect storm” in the high sulphur fuel market. Long before IMO 2020 there had been demand for this bottom of the barrel product to be converted into distillate, he said.
I saw a small-scale example of this myself some years ago in the UAE, where many emirates had a state-controlled price on gasoline. Diesel, on the other hand, had no price cap and was widely used for construction plant machinery and personal generators to supply electricity for air conditioning in the summer months.
In the unregulated environment, a hugely liquid market in micro refining and blending sprung up, in many cases on the basis of cheap Iraqi diesel oil.
The point, of course, is that the idea of using cheap heavy fuel oil has become well established outside of the marine industry, and the conjecture at the Tanker Freight Derivatives Forum was that those who had fitted scrubbers will find themselves in competition for a diminishing supply with non-marine users.
This complex matrix of crude oil (sweet or sour), refinery capacity and capability, blending, and demand has put IMO 2020 behind the wheel of the crude oil market. I cannot recall a time when the tanker industry has had such an unexpectedly powerful influence on both its fuel supplier and customers, providing cargo.
As a service provider, it is not the tanker industry’s natural habitat. A service provider should be marginally improving the service, making it safer, more efficient and cheaper as the customer demands. The one thing a service provider must not do is disrupt the customers' business, and that appears to be the impact IMO 2020 is having on the crude oil industry.
I fear that this episode will come back to haunt the tanker industry in the form of customers and suppliers demanding a more overt say in the creation and implementation of regulations in the industry. The somewhat cosy and archaic assembly of nations and associations discussing regulations at IMO will feel the full force of high level corporate/political lobbying or will be by-passed completely by a new high-level inter-governmental global regulatory lansdscape effectively created by the global businesses impacted by shipping regulation.