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New marine sulfur rules, rising demand to aid global refiners through 2020

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New marine sulfur rules, rising demand to aid global refiners through 2020

Tighter marine fuel sulfur standards that go into effect at the beginning of 2020 will help to boost the earnings of global refining and marketing companies at least through the end of that year, analysts at Moody's said in a Sept. 30 outlook.

The International Maritime Organization, or IMO, will lower the marine fuel sulfur cap from 3.5% to 0.5% on Jan. 1, 2020. Experts have said the regulation will result in a 20% shift in the high-sulfur fuel oil market to drive a steep increase of more than 1.4 million barrels per day in distillate demand.

Moody's analysts predict the regulations, together with U.S.-government projected global petroleum demand growth, will lead the worldwide sector's EBITDA to grow by more than 15% through 2020.

The analysts cited the U.S. Energy Information Administration's projection for global refined product demand to grow by 1.4 million barrels per day in 2020, with China accounting for 500,000 bbl/d and India accounting for 200,000 bbl/d of that growth. But Moody's added, "Slowing global growth poses a key risk to our positive outlook, based on trade tensions and other factors."

"North American refiners will fare the best, with expanding gasoline and diesel margins," Moody's wrote. "Stricter limits on sulfur content in marine fuels under the new IMO 2020 rules will boost earnings of complex refineries, especially in North America. Margins will improve for Asian refiners, but capacity additions and lower demand would dampen margins."

The analysts said the crude oil discounts that have recently boosted U.S. refiner earnings will likely moderate in 2020, noting that the $7-per-barrel discount that West Texas Intermediate crude oil traded to Brent will likely decline to $5/bbl. Inland crude oil discounts are likely to narrow as well, they wrote.

"Midstream constraints on crude takeaway capacity, which have widened commodity price differentials between basin hubs and benchmark prices, are steadily narrowing as new pipelines connect the refiners to their markets or export facilities," the analysts said, noting that Midland, Texas crude oil discounts to oil delivered at Cushing, Okla., that had been as high as $20/bbl in 2018 had narrowed to less than $1/bbl as pipeline capacity to the Gulf Coast had come online. "Sufficient takeaway capacity will improve in-basin crude prices and bring differentials closer to transportation costs."

However, Moody's expects companies with access to Western Canadian Select, a heavy crude oil, to benefit as Canadian officials ease production curtailments. The production cap — extended for another year in August — was set at 3.65 million bbl/d when it went into effect in January 2019. The curtailment has since been eased and stands at 3.74 million bbl/d for August and will rise to 3.79 million bbl/d by October.

"We believe the discount will eventually widen to more closely reflect the [$18-to-$20-per-barrel] cost of transportation once heavy crude feedstock is more widely available," the analysts wrote.