BAKU, Azerbaijan, Nov.25
By Leman Zeynalova – Trend:
New regulations of the International Maritime Organization (IMO) will trigger a major swing in marine fuels demand, Trend reports with reference to Fitch Solutions Macro Research (a unit of Fitch Group).
“Global oil markets are beginning to feel the ripple effects from the implementation of International Maritime Organization's new sulphur cap. Effective January 1 2020, these regulations will limit the allowable sulphur content in marine fuels used outside of Emissions Control Areas to 0.5 percent mass-by-mass, down from 3.5 percent currently. Compliance with the cap - which we expect will be high (c.90 percent) - will trigger a major swing in marine fuels demand,” said the company.
Shipowners have begun the switch to compliant fuels and this shifting pattern in the demand has fed through into large and sudden moves in the underlying price differentials. Predictably the most pronounced change has been seen in the differential between high and low sulphur fuel oil.
The bunker market is a major source of demand for high sulphur fuel oil (HSFO) and the loss of this market is forcing prices downwards. Currently the market is pricing in a relatively rapid adjustment to the cap, with the futures curve signalling a narrowing of the spread from January 2020.
“While we believe this may be somewhat underbaking the potential impact, we do not now expect to see any major dislocation in the wider oil markets, given that both shipowners and suppliers seem increasingly well-prepared for the change. That said, we are seeing some feed through from the products market to the crude market. Specifically, more attractive margins on light and sweet crudes are feeding into stronger differentials. This is most true of grades that offer a comparatively high yield of middle distillates,” reads the report.
The demand for low sulphur fuel oil (LSFO) appears robust, in the face of fuel stability concerns and potential compatibility issues, according to Fitch Solutions.
“Many of the issues are not new and can also arise with HSFO. But due to the wide range of LSFO grades expected to be made available and the considerable variance in their individual properties, the concerns now are naturally greater. That said, no major issues seem to have been experienced in the use of LSFO to date and whatever concerns may be lingering, they do not appear to be denting demand. LSFO holds a clear cost advantage over marine gas oil (MGO) and this seems to driving the uptick in its usage,” reads the report.
Diesel demand, which is sensitive to trends in industrial activity and trade growth, has struggled this year, weighed down by slowing economic activity and rising trade tensions. However, margins have found some support from the ramp up of marine gas oil purchases ahead of January 2020. Although the macro backdrop looks clouded heading into the new year, rising bunker demand should offer a pocket of strength, according to the company.
“We are more agnostic on gasoline. Gasoline demand has also taken a hit in 2019, with consumption dragged lower by a slump in the autos sector and broader pressures emerging on consumer spending in key markets. The outlook for growth looks somewhat improved in 2020, but demand is unlikely to be strong. To optimize their product mix, refiners may look to blend vacuum gas oil (VGO) into LSFO, rather than feeding it through fluid catalytic crackers (FCC),” said Fitch Solutions.
Given the primary output from the FCC is gasoline, this would in turn lower supply and should help to support prices in the face of continued weak demand, reads the report.
“We believe that sweet-sour crude differentials will remain relatively well-contained, as stronger demand under IMO 2020 is offset by the falling supply of heavy crudes and continued strong growth in US shale.”
The premium of light sweet crudes over heavy sour crudes has been strengthening of late, in large part due to the shifts in demand triggered by the new sulphur cap. However, we do not expect the spread to blow out in 2020, given that the combination of US sanctions on Veneuzuela and Iran, the OPEC+ production cut agreement and heavy decline rates among some legacy producers has taken a large volume of heavy sour supplies out of the market.
“Although we do not expect to see substantial further declines, it is also unlikely that this supply will be returned next year. Meanwhile, US shale production - which is very light and very sweet - continues to g row rapidly. In fact, according to our forecasts, light sweet crude will account for over 80 percent of global supply growth over 2019 to 2023.”
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