Viewpoint: IMO 2020 to have delayed price effect

The International Maritime Organization (IMO) as of 1 January capped the sulphur content of marine fuels to 0.5pc from the prior 3.5pc level. The new regulation is referred to as IMO 2020.

Most market participants expect IMO 2020-related demand to cause prices to rise in January-February and tighten the availability of low sulphur fuel oil (LSFO), which has a 0.5pc sulphur content. The full impact of IMO 2020 is more likely to be felt in March, as some expect a spike in distillate and sweet crude demand once the current global stockpile of LSFO has dwindled.

Global residual fuel oil hubs such as Fujairah, Rotterdam and Singapore are reported to have large volumes of IMO-compliant fuel available. But US Gulf LSFO values are 31pc higher than a year ago, while HSFO values are down by 14pc as the market prepared for IMO 2020.

Most US Gulf coast refiners in 2019 were in the process or had completed making LSFO blends that will comply with the IMO regulation. These blends can include various combinations of HSFO with products like MGO, 0.2pc sulphur heating oil and 0.0015pc sulphur ultra-low sulphur diesel (ULSD). Light and heavy crudes could trade at a wider differential because lighter crudes are highly sought by Gulf blenders to make IMO-compliant fuel.

Diesel cracks could rise significantly in the event shipowners experience issues using LSFO, either because LSFO is more expensive than marine-gasoil (MGO), an alternative IMO-compliant fuel, due to incompatibility of new blends. Mixing different batches of LSFO blends with varying aromatic and paraffinic components on ships can lead to sludge formation or asphaltene separation, both of which have the potential to seriously damage ship engines. According to some traders, most Gulf blenders have completed compatibility testing on their blends, but participants have expressed divided opinions on the degree to which shipowners should trust new blends as they enter the market.

It remains to be seen how LSFO will contend with marine-gasoil (MGO), a blend of lower sulphur distillate fuel, in the Gulf market, after averaging a $111/mt discount to MGO in December. For a global perspective, physical LSFO priced at a $5-$10/t premium to MGO spot assessments in Singapore for the week ending on 20 December, after pricing at discounts to MGO for November and December.Panama sales of LSFO rose to a premium over MGO on 13 December, the first instance of a premium of LSFO levels to MGO in the Americas thus far. But with MGO typically being a more expensive distillate blend, most market participants expect it to remain an emergency-only option in the US Gulf coast.

Other alternatives for shipowners include installing expensive scrubbers, exhaust cleaning equipment which remove sulphur oxides from the ship's engine, enabling the use of heavy fuel oil. Roughly 3,000 vessels have installed sulphur scrubbers globally, according to Argus consulting data.

HSFO is not predicted by market participants to fade out of the US market entirely, but rather remain through scrubber use or non-compliance. Global HSFO supply has already been curbed as refiners have reduced their production.

The power generation market is an alternative destination for HSFO, particularly in the US northeast. Some Gulf refiners with the ability to process heavier sulphur fuel oils through their cokers to turn into cheaper refined products and sell worldwide may also draw on on HSFO. As a result, imports of HSFO continue to flow into the US Gulf from places like Russia and Iraq. HSFO prices first dropped below $40/bl in mid-October and have since averaged at $37.97/bl over the last two and a half months. Traders expect HSFO to find a price floor in the first quarter.

By Kayla Meyertons