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In just 12 months, the global bunker fuel specific reduces from
maximum 3.5% sulfur to maximum of 0.5%. Neither the refining nor
shipping industry appears to be prepared for this, which would
result in significant oil market disruption. The recently published
IHS Markit study, Navigating Choppy
Waters, has just been published. Detailed, granular
analysis revealed the following:
In 2020 50% of the new VLSFO (the new very low sulfur fuel oil
- 0.5% sulfur) bunker fuel will come from non-distillate refinery
streams, with the other 50% coming from distillates.
Scenario and Monte Carlo analysis confirms a likely wide range
of oil market impacts starting from mid-2019, with most scenarios
indicating considerable repercussions.
The impacts of IMO 2020 scramble will be felt far beyond the
core oil markets.
As a result, the IMO 2020 scramble is unlikely to be calm
for oil markets, and careful navigation will be required by anyone
exposed to oil markets and freight rates.
In late 2016, the International Maritime Organization (IMO), a
specialized agency of the United Nations (UN) devoted to the safety
and security of shipping and marine pollution, announced that
beginning on 1 January 2020, the maximum sulfur content permitted
in marine bunker fuel will be reduced from 3.50% by mass (m/m) to
0.50% m/m on a global basis. The IMO sulfur content regulations
will have a very significant impact on both the refining and
shipping industries with knock-on impacts in other commodities and
industries.
The refining industry will have to alter its current product
slate, increase the supply of low-sulfur fuels and manage excess
supply of high-sulfur fuels. In the years immediately following the
implementation date, the light-heavy oil product price spread will
spike and refining margins will rise, particularly for complex
refineries.
Shipping companies will have to choose between one of three main
pathways if they are to comply with the sulfur cap: switch to
purchasing low-sulfur bunker fuel, install exhaust gas cleaning
systems (scrubbers), or switch to LNG.
With only 12 months remaining until the specification change
there is a great deal of uncertainty remaining, the most
significant of which is the level of compliance with the new
regulations. Not only is it difficult to enforce compliance in the
open seas, but there is also uncertainty over whether sufficient
supplies of compliant bunker fuels will be available. Moreover,
various countries with a coastline are not signatories to the IMO
treaty, and it is unclear to what extent they will enforce the new
regulations. As a result of this uncertainty, both the shipping
industry and the refining industry have been slow to make the
investments required for smooth adoption of the IMO sulfur cap
regulations. This will likely induce a "scramble" around the 2020
implementation date.
IHS Markit has just completed a major study, Navigating Choppy
Waters, into this implementation, the three key findings of
the study are:
1- Granular refinery analysis by IHS Markit indicates
that in 2020 50% of the new VLSFO (the new very low sulfur fuel oil
- 0.5% sulfur) bunker fuel will come from non-distillate refinery
streams, with the other 50% coming from distillates.
IHS Markit carried out refinery-by-refinery analysis using our
global refinery modelling system to understand the likely producers
of VLSFO based on crude processed, capability and economics. We
also used our ship tracking to assess demand and create the VLSFO
and HSFO balance for each region (which are anonymously shown in
the figure).
2- Scenario and probabilistic (Monte Carlo) analysis
confirms expectations of a potential wide range of oil market
impacts starting from mid-2019, with most scenarios indicating
considerable repercussions.
IHS Markit analysed seven alternative scenarios as well as a
basecase. The scenarios included all the key uncertainty variables
for the transition, such as high and low compliance, high and low
scrubber installation, refinery project delays and phased
implementation in 2020. The figure on the right shows the output
from some of these scenarios on the global light-heavy
differential. The pricing granularity was quarterly through 2019-21
to study the dynamics of the transition.
The analysis confirmed the sensitivity of the market impact to
changes in some of the variables, and also which variables are the
most significant and need to be most closely monitored through
2019.
IHS Markit then completed Monte Carlo probability analysis to
gain an understanding of the range of impacts and distribution. The
analysis confirmed there is a considerable range of potential
outcome, albeit with a skewed distribution, and that considerable
market disruption is the most likely outcome.
3 - The impacts of IMO 2020 scramble will be felt far
beyond the core refinery products markets. IHS Markit has analysed
the impact on shipping freight rates, sulfur, coke, propylene,
octane, lubricants markets, and even potentially global consumables
prices and holiday cruise prices.
In the study IHS Markit also analysed the impact on global
freight rates and other markets. We found that a two-tier freight
market might develop, with VLCC for ships without scrubbers being
up to $10,000 per day lower. The potential impact of the IMO
scramble on Group 1 baseoils (used to make lubricants) was also
found to be particularly significant, because their by-products
tend to be high in sulfur.
All-in-all, the IMO 2020 scramble is unlikely to be calm for oil
markets, and careful navigation will be required by anyone exposed
to oil markets and freight rates.
This blog is a summary of some of the key findings from the IHS
Markit Navigating Choppy Waters study www.ihsmarkit.com/imo2020
Posted 07 January 2019 by Spencer Welch, Vice President - Oil Markets & Downstream Consulting, IHS Markit
