• DATVF.VSU
    1.240
    0.043
    3.6%
  • DATVF.VWU
    1.526
    0.008
    0.5%
  • DATVF.DALLAX
    0.918
    0.057
    6.6%
  • DATVF.CHIATL
    1.968
    0.105
    5.6%
  • DATVF.LAXSEA
    2.032
    0.012
    0.6%
  • DATVF.PHLCHI
    0.948
    0.019
    2%
  • DATVF.ATLPHL
    1.620
    0.055
    3.5%
  • DATVF.SEALAX
    1.021
    0.006
    0.6%
  • DATVF.VNU
    1.426
    0.037
    2.7%
  • DATVF.LAXDAL
    1.562
    0.030
    2%
  • DATVF.VEU
    1.512
    0.060
    4.1%
  • ITVI.USA
    9,610.920
    -3.840
    0%
  • OTRI.USA
    5.260
    0.040
    0.8%
  • OTVI.USA
    9,602.080
    -1.710
    0%
  • TLT.USA
    2.600
    0.000
    0%
  • WAIT.USA
    150.000
    0.000
    0%
  • DATVF.VSU
    1.240
    0.043
    3.6%
  • DATVF.VWU
    1.526
    0.008
    0.5%
  • DATVF.DALLAX
    0.918
    0.057
    6.6%
  • DATVF.CHIATL
    1.968
    0.105
    5.6%
  • DATVF.LAXSEA
    2.032
    0.012
    0.6%
  • DATVF.PHLCHI
    0.948
    0.019
    2%
  • DATVF.ATLPHL
    1.620
    0.055
    3.5%
  • DATVF.SEALAX
    1.021
    0.006
    0.6%
  • DATVF.VNU
    1.426
    0.037
    2.7%
  • DATVF.LAXDAL
    1.562
    0.030
    2%
  • DATVF.VEU
    1.512
    0.060
    4.1%
  • ITVI.USA
    9,610.920
    -3.840
    0%
  • OTRI.USA
    5.260
    0.040
    0.8%
  • OTVI.USA
    9,602.080
    -1.710
    0%
  • TLT.USA
    2.600
    0.000
    0%
  • WAIT.USA
    150.000
    0.000
    0%
FuelMaritimeOcean shipping

IMO 2020 presentations outline scenarios for fuel switching that will impact diesel markets

The threat to the trucking industry from the IMO 2020 regulation has always been whether the new rule affecting marine fuels is going to pull so much product from the distillate/diesel supply chain that the pain at the pump affects both trucking capacity and the bottom line for carriers big and small.

In two presentations at different events in Houston Wednesday and Thursday, the answers given by several industry experts were not encouraging. Nobody gave a price prediction; as long-time industry observer and near-legend Adrian Tolson told the S&P Global Platts conference on bunker fuel and residual fuel, “that number defies analysis.”

But Tolson, as well as Abudi Zein and Matt Smith at an event sponsored a day earlier by Clipper Data, predicted that there will be a significant move toward greater consumption of marine gasoil (MGO) as a marine fuel when IMO 2020 begins to impact markets as it moves toward full January 1 implementation.

Marine fuel markets that will be required to burn fuel containing no more than 0.5 percent sulfur have several paths to be in compliance, all of which could have direct or indirect impact on over-the-road diesel markets. The current sulfur limit is 3.5 percent.

But the most immediate question was always going to be whether ship owners, moving away from high sulfur fuel oil (HSFO), would turn to the existing MGO product, which is a low sulfur diesel-like product, or a new series of products that go under the banner of very low sulfur fuel oil (VLSFO). Although VLSFO is not a product out of the distillate “family” like diesel or MGO are, a diesel-like intermediate product known as vacuum gasoil (VGO) is expected to be blended into making the VLSFO, which would divert the VGO from making finished diesel. So VLSFO also has an impact on diesel supplies, but not as much as a rush to consume more MGO.

Tolson said he sees the market as going 55 percent to VLSFO, 25 percent to MGO and 20 percent to HSFO, which will continue to be used in scrubbers that extract sulfur from emissions. “The world wants to buy VLSFO,” he said.

But Tolson said the global market is going to need about 150 million metric tonnes per year of VLSFO. The question, he said, is “can we produce it?” Major oil companies have been announcing their plans to produce a series of IMO 2020-compliant fuels and Tolson noted that in the marine fuel market, power is shifting back to the big companies.

But whether there is adequate supply of IMO 2020-compliant fuels is a significant question to the users of over-the-road diesel. As Tolson said, if the supply of VLSFO falls short of demand, prices will increase and that demand will shift over to MGO. As he noted on one of his slides, “the end result is greater middle distillate demand and much higher prices for MGO and VLSFO.”

While Tolson did not mention over-the-road diesel, the simple fact is that higher prices for those two products will attract diesel supply into those pools, resulting in higher prices for ultra low sulfur diesel as well.

At the Clipper Data event, CEO Zein said that his company’s analysis is that demand for MGO will increase by 1.3 million barrels per day (b/d) next year in reaction to IMO 2020. It’s always difficult to pinpoint in analyses like this where that increase comes from. But in the case of MGO, it would be coming primarily from fuel oil demand, so that is fresh demand for a portion of the world’s diesel barrel.

To put that 1.3 million b/d in perspective, annual average increases in global demand for all petroleum has been either side of the 1.5 million b/d level. A 1.3 million b/d increase in demand for MGO would not be new petroleum demand; it would be repurposed from fuel oil to diesel. But a growing world economy uses at least that many “new” barrels of all sources of petroleum every year, so a shift of 1.3 million b/d from one part of the barrel to another is a significant amount.

However, as Clipper Data’s Smith noted, every barrel of displaced fuel oil demand that goes into MGO is less VGO being blended into VLSFO, even if the latter is the ultimate IMO 2020 solution longer-term. Counting the 1.3 million b/d increase gets complicated because the percentages of VGO to be blended into VLSFO differ by product.

The markets are so linked that trying to count diesel barrels to be affected, and assuming that’s the end of the exercise, is somewhat futile. The IMO 2020 impact on the price of over-the-road diesel is going to be affected by numerous other factors that both Tolson and the two Clipper Data executives touched on. How much non-compliance will there be with the new rules? (Not a lot, according to Tolson. Every barrel of non-compliance means a barrel of HSFO continuing to be consumed and a barrel of diesel not being consumed. Lower non-compliance is more likely to drive prices higher.) How much will shipowners stay away from the new VLSFO blends in the beginning because of uncertainty of how it will perform? (Tolson expressed some concern, but his 55 percent estimate on market share clearly shows some level of wide acceptance; Zein was far more dire in predicting ship owners will try to avoid it.)

And another question – if distillate prices and refining margins surge, and producing distillate products becomes so profitable that refiners ramp up their operations to make more of it, what is the market impact then? “That distant drumbeat of IMO 2020 is getting louder and louder, so we could see the  margins boosted in distillates,” Smith said. “Refiners could run pretty strongly.” A side impact of that also would be an increase in gasoline supplies, with no concurrent increase in demand and the possibility of plunging gasoline prices.

The louder drums were also evidenced in a remark by Tolson who noted that the transition will start in a time-frame that is now measured in weeks, as ship owners start this fall to get their systems set up to be fully compliant by January 1.

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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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