New analysis suggests a strict implementation of IMO’s sulphur cap could prompt a scramble that drives up distillate prices, writes Kevin Turner
Distillate prices will exceed US$1,000/tonne after 2020 as a result of the global sulphur cap, according to an analysis by EnSys Energy and Navigistics Consulting. The findings, contained within an update of the two organisations’ 2016 report Supplemental Marine Fuel Availability Study, highlight the risks facing the global economy as a result of the 2020 sulphur cap.
The study noted “As 2020 gets closer the picture is becoming clearer and it does not look good for the global economy.” It highlighted the following four significant findings:
• Lower than previously expected uptake of exhaust gas cleaning systems (scrubbers) that enable continued use of higher sulphur marine fuels.
• Higher total global demand for distillates and other fuels.
• Global refinery projects and expected 2020 distillate manufacturing capacity are moderately higher than previously expected.
• A ‘scramble’ period in which less-complex refineries bid up the price of light sweet (low sulphur) crude to produce more low-sulphur distillate and less residual fuel.
The report stated “It is quite likely, based on EnSys’ World Oil Refining Logistics and Demand model, that during the ‘scramble’ period in 2020, distillate prices will exceed US$1,000 per tonne and US retail gasoline prices will spike at over US$5 per gallon (if crude oil prices enter 2020 at around US$80/b [Brent] and spike to the US$120/b range).”
Brent and NW E Product supply costs – 2018 to 2030 (image: Navigistics Consulting)
The analysis shows that nearly 4M b/d of high sulphur residual fuel will need to be switched to 0.5% sulphur marine fuel by 1 January 2020 to achieve full compliance. Even with a reduction in ships’ economic speeds associated with a price spike to US$1,000 per tonne for marine fuels and assuming current non-compensatory freight rates prevail in 2020 and that higher freight rates incentivise higher speeds, well over 3M b/d will still need to be switched.
Commenting on the findings, EnSys Energy president Martin Tallett said “Our assessment of the overall global liquids supply-demand refining balance points to a maximum capability to supply marine fuels in the first half of 2020 of around 3M b/d.” He noted that, if allied to a strong determination to strictly enforce Annex VI, this outlook leads to severe market strains affecting all products in all regions – not just marine fuels.
Referencing events across 2007/2008, when prices for Brent, gasoline and diesel more than doubled, Mr Tallet spoke of “a distinct risk that prices will be bid up in a scramble for sweet crude.” There will be some winners, he said, but the market will correct itself, potentially with significant economic damage resulting. “Barring a trade war or other event that cuts economic growth, trade and oil demand going in to 2020, the increase in product supply costs “could take US$0.5Trn to US$2Trn out of the global economy over the course of the year,” he said.
Furthermore, a strict implementation approach by IMO will also likely lead to severe economic disruption in the maritime industry itself, according to Navigistics Consulting president David St Amand, who noted that “in addition to substantial increases in the delivered costs of goods – including crude oil and petroleum products – shipped by sea, strict implementation could lead to trade being impacted through [a] problematic implementation of IMO’s Annex VI Regulation 18, involving how to handle situations where compliant fuel is not available.”
These issues, among others, were discussed at IMO’s Intercessional Meeting on 2020 Implementation, held 9 July, during which details for implementing the fuel rule progressed according to Mr St Amand. Shipboard implementation plans were also approved during the meeting, but not made mandatory, with no third-party review required. Mr St Amand noted that “positions on non-availability situations and a definition of sulphur (what test level is a violation) were being established but no consensus had been reached.”