Tuesday, 22 September 2020 | 09:33
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Momentous shipping fuel shake-up playing out in unexpected ways

Tuesday, 03 December 2019 | 12:00

Just weeks away from the implementation of new rules mandating the use of cleaner-burning shipping fuel, the impact on energy markets isn’t playing out quite how the pundits thought it would.

The International Maritime Organisation standards, known as IMO 2020, that take effect on January 1 will prohibit vessels from burning fuel with more than 0.5% sulphur unless they’re fitted with pollution-reducing kits. Vessels have traditionally used fuel with a sulphur content of around 3%.

The regulations, which were first flagged as far back as 2016, were expected to impact the market in several ways. Dirty high-sulphur fuel oil was forecast to plunge, cleaner alternatives like diesel would rise, while demand for heavier and sour crudes used to produce HSFO would decline. But in defiance of the common wisdom, only one of those three things has happened. High-sulphur fuel oil has, as expected, plummeted. Apart from a short-lived spike in September following the attacks on Saudi Arabia, HSFO prices in Singapore relative to Dubai crude have been in steady decline since the beginning of August and are now at a record $25 per tonne discount.

Dirty fuel oil is now so cheap that it’s becoming attractive for electricity generators in places like Pakistan, where there is a lack of environmental rules prohibiting its use. Prices are likely to lurch even lower when a so-called fuel-carriage ban that will prevent vessels without scrubbers from carrying HSFO for later use takes effect March 1.

Diesel, specifically marine gasoil, was expected to be the big winner from IMO 2020. But the emergence of alternatives such as very low-sulphur fuel oil and sluggish economic growth in Asian powerhouses like China and India has contributed to a glut that’s weighed on prices.

Returns from making diesel from crude in Singapore were at $14.41 a barrel on November 26, near a six-month low. The profits, or refining margins, have averaged $16.81 so far this half, compared with an August estimate by Goldman Sachs Group Inc for an average of $17.60 over the six-month period.

Sour crude with a high-sulphur content prevalent in the Middle East and parts of Latin America was expected to take a hit relative to sweeter grades from the US and North Sea. That’s because there’s only a limited number of refineries that can process sour varieties into less-pollutive fuels.

In reality, however, the spread between sour Dubai crude and sweet Brent has barely budged. Citigroup Inc analysts predicted in April that Brent’s premium over Dubai would widen to more than $8 a barrel later this year due to IMO 2020. It was $3.10 on Tuesday.

US sanctions on Iran and Venezuela have crimped the availability of sour crudes, while, more recently, protests in Iraq may have spurred demand on fears the unrest may worsen and affect production.
Source: Mena FN

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