Tougher marine fuel sulfur standards could strain already tight supplies of middle distillates in the U.S. and boost margins for manufacturers of the fuel this winter, experts say. Even so, governments are unlikely to intervene to delay the rule.
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.
Calling the tightness in the middle distillate market "disturbing," PRICE Futures analyst Phil Flynn said Oct. 9 the regulations "are already creating a situation where supplies are well below normal."
The U.S. Energy Information Administration reported a 3.9-million-barrel drop in U.S. distillate stockpiles in the week to Oct. 4, which Flynn said would support prices. The week's draw brought stockpiles to 127.3 million barrels, just 2.2% above the five-year minimum for the week.

Distillate cracks, as shown by the difference in price between a barrel of heating oil and a barrel of crude oil, have been rising, with the New York Harbor heating oil–Brent crude oil crack hitting $21.98 per barrel on Oct. 8.

"The middle distillate [market] is seeing much more extreme tightness than [other petroleum markets]," Citigroup's managing director and global head of commodity research Edward Morse said at an Oct. 8 event unveiling the EIA's Winter Energy Outlook. "We would not be surprised if [the crack] hits $30 per barrel over the course of the winter. We have a bull case in which the market could be very tight for middle distillates, and we have a 30% likelihood of the bull case against our base [case] of $25 crack spreads."
Morse pegged the high-sulfur fuel oil market at 5 million bbl/d, of which roughly two thirds he said would be affected by the tighter regulations.
Morse estimates the potential supply of compliant 0.5% sulfur fuel oil to be approximately 1 million barrels per day. He expects the 1.2 million bbl/d supply gap will be filled by 1.2 million bbl/d of 0.1% sulfur marine gasoil, which he said could push distillate cracks to above $25/bbl from late-2019 through the first half of 2020.
Morse said he does not expect governments to intervene to delay the rule, citing the relatively short duration of its impact and current fuel prices.
"Certainly it's the case that if this were a $75 or $85 market, rather than a $45 or $55 market, you would expect governments to intervene to do something about this January 1 date for IMO 2020," Morse said. "This will not be a 2020-2021 winter issue by the time we get to a year from now."
