The IMO 2020 sulphur cap has created the unusual situation of shipping dictating the direction of the crude oil markets
Speaking at the Tanker Freight Derivatives Forum, hosted by the Baltic Exchange and the FFA Brokers Association, ICE Futures Europe’s director of market development Mike Davis noted that shipping and IMO 2020 has jumped to the top of the agenda with refiners.
“The impact has spread way beyond the immediate marine sector,” he said.
“There is something of a ’perfect storm’ going on in the high sulphur fuel market at the moment, even before the entry of low sulphur fuel,” he told the room of freight traders and shipbrokers.
“In the past, the residual fuel oil traded to the crude oil price.” He noted that residual fuel oil was not traded in the same manner of the higher end products such as gasoline and was not regarded as primary price indicator.
“Right now, (residual fuel) is of primary direction,” he said, “as the basis for that fuel is changing”
“In the past you could say that the residual fuel price was driven by the crude oil price. Now, you could say the crude oil price is being driven by the decisions in the marine industry.”
He points to a set of new paradigms around low sulphur fuel and the rest of the oil refinery slate. One aspect is that the pursuit of the higher end oil products has effectively “destroyed” the bottom of the barrel and products like marine fuel and diesel.
“A key to looking at marine fuel is to look at the types of crude oil that are available to make it, but also the kit that is there to turn crude oil into this marine fuel,” he said.
One driver has been lubricity with fuel oil moving from a standard of 180 cst to 380 cst in the last two decades, driven by the requirements of the tolerances of modern marine engines, but the 0.5% sulphur fuel must still meet this requirement.
“If the refining industry was honest, we are not sure [if] this fuel is going to come from a blend, or a straight run fuel,” he said. “There is no clear signal – [of] how much will be produced from the distillate complex or from a ’pure’ fuel oil solution.”
He reported that the traditional high discount on heavy fuels encouraged a secondary conversion to cleaner fuels and “people are destroying fuel oil to make more valuable distillate fuels,” reported Mr Davis.
According to Mr Davis, there is a historical example of what happens when demand for a certain oil product conflicts with the crude oil available to produce it. “We have seen this before. In 2008, diesel was US$40-50 barrel over the price of crude oil and the marginal barrel at that time was a Saudi or an OPEC heavy (crude oil). What we wanted at the time was more light sweet crude oil, such as Brent or WTI to turn it into diesel,” he said.
In the 2008 example, the Chinese tried to stockpile diesel ahead of the Olympics. Eventually, the refiners were able to respond and there was a price crash. “Price is the lever that will force refiners to produce what is required,” he noted.
The current situation is similar in that the demand is for distillate, but this time there is plenty of light sweet crude oil coming from the US. “Unfortunately,” said Mr Price, “it’s not quite the right sort of crude oil. It lacks some of the mid-parts of the barrel.”
The fact is that traditional heavy fuel has become valuable as a secondary feedstock and is being used as an alternative to crude oil to make more distillate.
This, he noted, is going to be an issue for those who have fitted scrubbers. The scrubber-fitted fleet is going to be in competition for heavy fuel oil with the secondary refiners seeking heavy fuel oil to convert into high value distillate – some of which may end up as ship fuel.
The challenge for the whole of the oil and gas industry is to try and work out how the shipping market is going to drive a complex matrix of interlinked options that starts with the type of crude oil and ends with the fuel burnt on the ship, which puts shipping in the driving seat of the crude oil market.
US crude oil refineries are said to be running at an unprecedented 97% utilisation. Will there be any capacity to produce IMO 2020 global sulphur cap compliant fuel? Find out at the Americas Sulphur Cap 2020 conference in Houston.