U.S. refining executives expect the impact of tougher global marine fuel sulfur standards to manifest fully in the second half of the year and suggested while discussing second-quarter results that signs of the coming market shift have already emerged.
Known as IMO 2020, the regulation requires vessels to burn marine fuel containing no more than 0.5% sulfur, down from the current standard of 3.5%, beginning on Jan. 1, 2020. Higher diesel prices and widening discounts for heavier, sour grades crude oil are among the anticipated effects of the rule that executives expect will provide a tailwind to their businesses.
"We continue to anticipate 1 million to 2 million barrels per day of increased distillate demand globally," Marathon Petroleum Corp. Chairman and CEO Gary Heminger said Aug. 1. Heminger expects the new standard will improve diesel cracks — the per-barrel margin of refining crude oil into diesel — by a range of $2 to $5 per barrel and improve coker margins by roughly $10 per barrel.
Heminger cited the increasing premium of low-sulfur to high-sulfur fuel oil along the forward price curve as an early indication of the rule's impact. He said spreads are currently at $16 per barrel and increase to $30 per barrel approaching year-end.
"The situation continues to develop as we speak, and we expect to see even more activity as we approach the fourth quarter," PBF Energy Inc. Chairman and CEO Thomas Nimbley said Aug. 1. "January 1, 2020 does put a line in the sand."
"We're expecting conversion of tanks in the September-ish time frame and expect shippers to be buying compliant fuels in the fourth quarter," Phillips 66 vice president of investor relations Jeff Dietert said July 26. "It's still early to have a high degree of confidence on exactly what impact it's going to have on diesel cracks, on compliant fuel, on high-sulfur fuel discounts. But I do see it being positive for the industry."
Valero Energy Corp. senior vice president of supply, international operations and system optimization Gary Simmons is taking the fact that high-sulfur fuel oil prices have yet to collapse as a sign of the coming market shift.
"You are seeing people start to turn tanks, and that's one of the reasons you see high-sulfur fuel oil strength," Simmons said July 25. "It's just not a very liquid market today and ships are having trouble actually buying high-sulfur fuel oil. … So you see the steep backwardation as we approach that January time line. … All the estimates I still see show a fairly significant step change in diesel demand when the IMO bunker spec changes, and it's not reflected in the forward curve today."