In a fireside chat at FreightWaves LIVE, Scott Susich, Director of Data for DTN, and FreightWaves' John Kingston discussed why the fuel market has seen no signs of IMO 2020, at least on an obvious level in regard to the price of diesel.
Beginning January 1, 2020, the worldwide regulation known as IMO 2020 goes into effect which requires marine fuel to be no more than 0.5% sulfur content. The current limit is 3.5% . In order to meet this rule, shipowners are expected to consume lower sulfur-fuels that have some quantities of diesel molecules in them, though they are also able to meet this rule if they burn higher sulfur fuel but are equipped with a scrubber that pulls sulfur out of the emissions, according to Kingston.
When IMO 2020 was announced, Susich recalled describing the roll-out of IMO 2020 as "falling on a spectrum of either a really big yawn or utter market chaos… Right now I would say, it seems to be leaning more towards the yawn."
Kingston noted that physical diesel prices did start to move higher approximately four to six weeks ago and this was seen as a sign by some market observers to be a result of IMO 2020. However, since that runup, diesel prices relative to crude – ultimately the most important barometer of an IMO 2020 reaction in the diesel market – have seen little movement, according to Kingston.
In comments after the session, Kingston noted that while there have been other market reactions to IMO 2020, none have directly involved diesel. For example, "the price of high sulfur fuel oil [HSFO], which currently is mostly used by ships, has fallen considerably as shipowners have moved away from it," said Kingston. Its spread relative to low sulfur fuel oil or the new very low sulfur fuel oil (VLSFO) grades that have been created to follow the regulations of IMO 2020 has blown out as demand for HSFO is collapsing.
Susich and Kingston discussed the many reports that supplies of the new compliant marine fuels have reported to be adequate. Many refiners and other suppliers have committed to having adequate supplies of compliant fuels, noted Kingston. "The reports of large amounts of inventories of these fuels building up in locations like Singapore may be good news for tanker owners but they may prove to be troublesome for diesel users if inventories of diesel have been diverted into making those fuels," commented Kingston.
Susich touched on previous shifts in the diesel market, particularly between 2006 and 2007, when the market moved to ultra low sulfur diesel (ULSD). Impacts of such shifts are not necessarily all about a big calamitous market move with soaring prices, but in the shift towards ULSD, it permanently moved the retail price of diesel above the retail price of gasoline, which reversed the long-standing relationship between the two, according to Susich.
How could IMO 2020 impact diesel markets? Kingston and Susich reviewed how new blends of VLSFO are going to be produced using large quantities of vacuum gas oil (VGO), which is an intermediate product that comes off a crude distillation tower and could be used to make gasoline through a unit called a cat cracker, or diesel through a unit called hydrotreater, according to Susich.
However, as VGO is diverted into making VLSFO, results could force a tighter market for diesel.
The other impact, according to Kingston, is in the market for marine gas oil (MGO). MGO is an existing product that requires little to no changes in order to be compliant with IMO 2020. There has been some concern that a surge in demand for MGO could potentially draw diesel molecules away from the production of over-the-road diesel.