• DATVF.ATLPHL
    1.795
    -0.005
    -0.3%
  • DATVF.CHIATL
    1.738
    0.070
    4.2%
  • DATVF.DALLAX
    1.102
    0.028
    2.6%
  • DATVF.LAXDAL
    1.495
    -0.012
    -0.8%
  • DATVF.SEALAX
    0.835
    0.053
    6.8%
  • DATVF.PHLCHI
    0.975
    0.049
    5.3%
  • DATVF.LAXSEA
    2.250
    0.072
    3.3%
  • DATVF.VEU
    1.503
    0.038
    2.6%
  • DATVF.VNU
    1.448
    0.036
    2.5%
  • DATVF.VSU
    1.299
    0.009
    0.7%
  • DATVF.VWU
    1.542
    0.062
    4.2%
  • ITVI.USA
    10,149.240
    -70.640
    -0.7%
  • OTRI.USA
    3.780
    -0.080
    -2.1%
  • OTVI.USA
    10,139.180
    -75.530
    -0.7%
  • TLT.USA
    2.500
    0.000
    0%
  • WAIT.USA
    151.000
    5.000
    3.4%
  • DATVF.ATLPHL
    1.795
    -0.005
    -0.3%
  • DATVF.CHIATL
    1.738
    0.070
    4.2%
  • DATVF.DALLAX
    1.102
    0.028
    2.6%
  • DATVF.LAXDAL
    1.495
    -0.012
    -0.8%
  • DATVF.SEALAX
    0.835
    0.053
    6.8%
  • DATVF.PHLCHI
    0.975
    0.049
    5.3%
  • DATVF.LAXSEA
    2.250
    0.072
    3.3%
  • DATVF.VEU
    1.503
    0.038
    2.6%
  • DATVF.VNU
    1.448
    0.036
    2.5%
  • DATVF.VSU
    1.299
    0.009
    0.7%
  • DATVF.VWU
    1.542
    0.062
    4.2%
  • ITVI.USA
    10,149.240
    -70.640
    -0.7%
  • OTRI.USA
    3.780
    -0.080
    -2.1%
  • OTVI.USA
    10,139.180
    -75.530
    -0.7%
  • TLT.USA
    2.500
    0.000
    0%
  • WAIT.USA
    151.000
    5.000
    3.4%
EnergyFuelMaritimeNewsTrucking

FreightWaves oil report: the prediction for the early days of IMO2020 is not good news for truckers

A weekly look at what occurred in the oil markets of the U.S. and the world this past week and what’s ahead.

If you’re a trucking company or a shipper and you’re worried about the impact of IMO 2020 on the price you’ll pay for diesel as a result of it, the dialogue at a Houston conference this week would not have soothed your concerns.

IMO 2020 conferences are frequent these days but what is not frequent are specific predictions about how the price of diesel will be impacted by the requirement that ships after January 1 burn fuel with a sulfur content of no more than 0.5 percent, down from the 3.5 percent limit now. The Argus Marpol Strategy Summit (Marpol being the international treaty governing pollution by ships and administered by the International Maritime Organization – the IMO of IMO 2020) was no different; outright price predictions of any degree of specificity were non-existent.

What is of interest to transport companies is that two of the key pathways that would allow ships to be compliant with IMO 2020 involve changes in oil consumption that have the potential to tighten markets for all distillate products, including diesel. While outright price predictions on the impact of those changes were few at the conference, the comments of several speakers were far more foreboding than has been heard elsewhere.

The key point made repeatedly is that while the oil industry will be producing new grades of a product called very low sulfur fuel oil (VLSFO) to replace the high sulfur fuel oil (HSFO) that has been the key product used in the marine fuels market for decades, shipowners will instead often turn to an old reliable when they make the switch – marine gasoil (MGO).

Gasoil is a low sulfur form of distillate, like diesel. MGO has various qualities particularly suitable for powering ships. But since it is a distillate, the basic process to make it comes out of the same system that produces over-the-road diesel.

And if marine gasoil is going to be increasingly used to meet demand coming from the maritime sector, it means that distillate molecules will be called upon to displace fuel oil molecules, a totally different beast. That diversion of distillate molecules into more marine uses has the potential to tighten the distillate/diesel market.

“Some truckers are going to pay more for running their trucks over the land, all over the world,” was the forecast of Ed Arnold, senior consultant of Argus Consulting Services. Arnold, talking about the diversion of demand into marine gasoil, said Argus thinks “there is just enough distillation capacity and other capacity to do that.” But he added that it “is not going to be cheap, it is not going to be easy, and it is going to be an expensive fuel in the first few years. But that [the switch to marine gasoil] is where most of the replacement occurs.”

The market for marine fuels has been estimated at either side of 3 million barrels per day. There are models about how the market will eventually replace all the HSFO being used now in that market, all of them a mix of VLSFO and other distillates, scrubbers (which allow the continued use of HSFO), liquid natural gas, or LNG (small for now) and non-compliance.

But the models are targeted at constructing the longer-term changes in the market that will occur to comply with IMO 2020. What they don’t do is try to forecast what will happen by this fall when ships begin cleaning out their tanks and putting compliant fuel into them. And that fuel will lean heavily toward marine gasoil, according to several speakers on the conference’s first day.

“Will the refining capacity be there?” Tony Odak, the CEO of John W. Stone Oil Distributor, asked rhetorically. “Yes, the refining capacity will be there.” But he questioned whether all the moves made by major oil companies, like ExxonMobil or Shell, to produce VLSFO for this radically changed market will be “interested in by ship operators. That is the big question,” he said. “I don’t have an answer to that.” A repeated theme in all discussions of the transition to IMO 2020 is that shipowners are going to need a strong track record of VLSFO performance before making the switch to it. Fully vetted MGO doesn’t have that problem.

Whether a ship owner turns to MGO or VLSFO is highly relevant to the over-the-road diesel market. The blending process for making VLSFO involves using a product called vacuum gasoil (VGO) blended with other components. VGO is a versatile intermediate product and can be used in other parts of a refinery to produce finished diesel or gasoline. But if it’s blended in to make VLSFO – a new application – its supply as a feedstock to produce finished diesel will be reduced.

The expectation is that the amount of VGO needed to make VLSFO will be less than the amount of VGO needed to make greater quantities of MGO, because VLSFO is a product that is not a full distillate product while MGO is.  A move then by the industry to VLSFO instead of just consuming greater quantities of MGO, a known product, would soften the amount of demand on the total distillate market from the transition. Companies with exposure to the price of diesel, like trucking companies, presumably should be pulling for VLSFO in this “competition.”

But it was said at the conference several times: shipowners are going to go with what they know, and that’s MGO. While Odak said at one point he did not “have an answer to that – “that” being whether shipowners would turn to VLSFO – during the question and answer session he was more certain. The “compatibility” and “rateability” of the new blends – rateability being an ability for shipowners to know they can get these blends at ports over all the world – will need to “settle out,” Odak said. “Until that gets worked out, I think it is going to be MGO for the most part.”

The price of diesel – whether it’s marine or over-the-road – will always be determined primarily by the price of crude. The question as IMO 2020 becomes the law of the world is how it will impact the price of diesel relative to the price of crude.

Arnold displayed a chart showing diverging spread values among various products that he sees being impacted by IMO 2020. The line on his chart showing the greatest growth in its spread was marine gasoil. “The effects on refining will be worldwide,” he said. “Spreads will increase.”

Dean Foreman, the chief economist of the American Petroleum Institute, had some cautionary words of a more calming type. He noted that there have been other times in history due to regulatory changes where fuel oil has been displaced in the market at a level equivalent to what is expected to happen in the coming years and over a corresponding duration. He noted the upcoming IMO 2020 regulations have been in the works for more than a decade, “and investments have been made so that this can be worked,” Foreman said. “There is resilience in the U.S. and on a global scale.”

But not everybody believes the market is ready for the switch. Anthony Teo, technology and LNG business development director at DNV GL, said he thought the level of preparedness was a 5 on a 1 to 10 scale. But that lack of preparedness covers many aspects of IMO 2020, like whether to adopt scrubber technology, which allows the continued burning of high sulfur fuel oil. “For those who are still thinking that they are waiting to see how things are going to come off, I think they missed the boat,” Teo said.

The view that the market will sort things out – as it usually does – was expressed by Stephen Broadbent, a trader of VGO and fuel oil at Flint Hills Resources. “Market prices will create incentives to supply enough compliant fuels for those who need them,” he said.

The issue though is how high those prices need to get before there is a supply response. That’s where the market could get bumpy for those who consume diesel fuel.

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John Kingston

John has an almost 40-year career covering commodities, most of the time at S&P Global Platts. He created the Dated Brent benchmark, now the world’s most important crude oil marker. He was Director of Oil, Director of News, the editor in chief of Platts Oilgram News and the “talking head” for Platts on numerous media outlets, including CNBC, Fox Business and Canada’s BNN. He covered metals before joining Platts and then spent a year running Platts’ metals business as well. He was awarded the International Association of Energy Economics Award for Excellence in Written Journalism in 2015. In 2010, he won two Corporate Achievement Awards from McGraw-Hill, an extremely rare accomplishment, one for steering coverage of the BP Deepwater Horizon disaster and the other for the launch of a public affairs television show, Platts Energy Week.

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