Refineries and supply chain not ready for ocean shipping’s uptake of new fuel; even heating oil prices possibly in play during election year.
A widely cited oil market expert offered a pessimistic view on the transition to low-sulfur fuel in the ocean shipping industry, saying the steamship lines and their customers are largely unprepared for the switch.
IHS Markit Vice Chairman Daniel Yergin says the International Maritime Organization’s (IMO) requirement that all ships burn fuel with no more than 0.5 percent sulfur starting next year will cause a “scramble” in ocean supply chains due to an industry-wide lack of preparedness.
“It’s a big change and in our view it will not go smoothly,” Yergin told an audience at the Journal of Commerce’s TPM 2019 conference in Long Beach. “This is a transformative event that will create winners and losers.”
IHS’ take on the issue, known by the shorthand IMO 2020, shows that six of seven scenarios it gamed out “pointed to significant increases in prices” for diesel fuel, which is most similar to what ships will burn starting in 2020.
He said the uncertainty about whether there would be a delay in implementing IMO 2020, how it would be enforced, and uncertainty around other fuel specifications meant delayed investment.
“This thing just crept up,” Yergin said. “The uncertainty retarded investment and planning around the issue.”
Currently, the ocean shipping industry consumes about 3 million barrels per day of high-sulfur fuel. Worldwide diesel demand was roughly 26 million barrels per day last year, according to the International Energy Agency. So in effect, IMO 2020 increases demand 11 percent almost overnight.
In comparison, China consumes about 3.4 million barrels per day of diesel, the IEA said.
“We think refining investments are insufficient to clear the market of high-sulfur fuel oil,” Yergin said.
The marginal ability to produce more diesel at any given refinery comes at the the expense of producing other fuels such as aviation fuel and heating oil. So even those fuels are likely to see tighter supply when shipping starts using more low-sulfur fuel.
“Some refiners are very well prepared and some are not,” Yergin said..
Yergin said that will have a “knock on” effect throughout the refining and transportation industries.
“It will have a major effect on shippers and refiners,” Yergin said. “It will also affect airlines and trucking.”
IMO 2020 has the potential to reach even more directly into consumers’ wallets. Yergin said IMO 2020 can also affect heating oil prices in the U.S. Northeast. Indeed, even the administration of President Donald Trump has weighed in on IMO 2020 asking for a phased-in approach due to political risk of higher heating oil prices in an election year.
“This will really affect heating oil in crucial swing states like Pennsylvania in the months leading up to the presidential election,” Yergin said.
With fuel accounting for 60 percent of operating expenses, ocean carriers will see the most impact.
The 2020 overhang comes during the spring period when ocean carrier annual contracts with shippers and forwarders begin to be negotiated. Yergin notes that discussions about those contracts will come at a particularly volatile time for oil prices due to the ongoing crisis in major OPEC producer Venezuela and the start of new sanctions against Iran.
Technological fixes, particularly sulfur scrubbers, are not going to have much impact. IHS estimates only about 2,000 commercial vessels worldwide will have scrubbers, about 2 percent of the world fleet. The rush of ships looking to get fitted with scrubbers will also mean lower availability.
“Scrubbers are not suitable for all ships,” Yergin said. “The market to acquire scrubbers also is very tight.”