The impact of IMO 2020 on oil markets is going to be less than projected, at least according to a newly published forecast by OPEC.
The cartel, in its voluminous World Oil Outlook report, said it has seen several shifts in oil markets that have led it to believe the transition to lower-sulfur marine fuels from higher-sulfur marine fuels will not be calamitous.
Although the report still labels IMO 2020 "disruptive," it also says that "changing market conditions and projections in terms of oil demand, supply and refining, as well as developments within the shipping industry, have led to some adjustments of previous IMO-related conclusions."
Among the reasons cited by OPEC are a series of changes in the world oil market, none of them so large as to be the overwhelming cause of why OPEC views the transition to be smoother than it had previously. And it hasn't completely given up on the idea that there may be some bumpy roads ahead for markets. After summarizing the market uncertainties that OPEC says would have led some companies to delay installation of capacity to deal with the requirements of IMO 2020. "This is another argument in favor of the view that the first year following the rules being enacted may see some market turmoil," the report said.
IMO 2020 will require that marine fuel contain sulfur of no more than 0.5% content, down from the current level of up to 3.5%. The rule goes into effect January 1. There are various solutions to the challenges created by IMO 2020 and several of them would create new demand for the diesel pool.
Among the changes in the market observed by OPEC that has led it to predict a less frenetic transition include a significant amount of new refining capacity being brought on worldwide. The IMO 2020 rule is global in scope; so is the refining industry and product markets.
The added refining capacity coming on exceeds the amount of expected additions in new demand for refined products. That in turn is being driven by unceasing reductions in forecasts for the projected increase in world demand next year, with many forecasts putting that increase at less than 1 million barrels per day (b/d). The end result, according to OPEC, is that "this puts less demand side pressure on the global refining system and provides more flexibility with regards to base refinery throughput to switch to IMO-compliant fuels."
The OPEC report also notes that largely because of increased output from the U.S. shale plays, the world's crude slate is becoming lighter and sweeter, with less heavy fuel oil produced out of the refining process and with lower sulfur content. (However, a large portion of the U.S. crude slate is "too light," and doesn't have a good yield of the middle distillates that make up the diesel pool.)
It's not just that there is more light sweet crude on the market; there's also less heavy sour crude, because of a combination of Venezuelan collapse, Iranian sanctions, OPEC cutbacks, Mexican production woes and Canadian restrictions on output. "This change in feedstock quality is expected to lower the pressure on conversion and desulphurization units, which are crucial for the production of IMO-compliant fuels," the report said.
After going through a series of numbers on estimates of how much demand will be affected by IMO 2020, OPEC concludes that diesel demand into the marine fuel sector will increase by about 1.5 million b/d next year, up about 600,000 b/d from this year. But given all the other shifts that OPEC sees occuring, in contrast to its earlier forecasts, "[we see] sufficientflexibility in the refining system in 2020 to address the sudden change in the fuel mix."
There are two other factors that OPEC spells out. It projects that compliance with the new rule will be about 85% next year, which is up 10 percentage points from its forecast last year. Compliance, in an odd way, is bad news for truckers because non-compliance would mean that a ship is continuing to burn high sulfur fuel oil and does not need to become a buyer in the diesel market.
In the same way that compliance is at odds with truckers' interests, a scrubber is very much an ally to truckers getting ready for IMO 2020. A scrubber on board a ship allows the continued burning of HSFO. And on that front, OPEC likes what it sees.
"The second half of 2018 and first half of 2019 saw a rapid increase in orders relative to the time of completion [of last year's report], with more orders having since been placed than previously expected," the report said. "By mid-year, there were about 2,000 scrubbers on ships, up from 500 from early last year."
Image Sourced from Pixabay