The forward market is currently not adequately reflecting sharp changes in fuel oil and middle distillate prices expected in 2020 after global marine fuel sulfur limits are cut to 0.5%, according to new research from S&P Global Platts Analytics.
Receive daily email alerts, subscriber notes & personalize your experience.Register Now
The International Maritime Organization's global sulfur cap is set to drop from 3.5% to 0.5% at the start of 2020, forcing most shipowners to switch from burning fuel oil to more expensive, cleaner alternatives.
The effects are likely to be felt in product prices throughout the barrel as refiners lose the main market for their residual fuel oil production and seek to produce more middle distillates to meet the new marine demand.
Platts Analytics has produced a new report with its forecasts for how the specification change will affect crude, refined product and freight markets.
"This is going to be the most disruptive change to hit the refining industry in its history," Chris Midgley, global head of Platts Analytics, said in a webinar promoting the report Wednesday. "Unlike other specification changes seen by the industry, this isn't a little bit of tweaking."
The current forward curve shows the high sulfur fuel oil discount to Brent crude widening to about $20.50/b in 2020, from a discount of about $14.80/b in 2019.
But fuel oil traders should expect a more pronounced price collapse than that in 2020, Rick Joswick, managing director for downstream oil analytics at Platts, said Wednesday.
"The market has not appreciated yet the degree and scope of these changes," Joswick said.
He added that the forward curve for middle distillates currently shows little change between 2019 and 2020, and this underestimates the impact the IMO's new rule will have.
Shipowners have the option to install scrubbers to clean the emissions at source on board their vessels to avoid a rise in bunker costs and carry on using fuel oil. But the high up-front capital cost of scrubbers, as well as technical concerns, have limited the uptake of this technology so far.
Platts Analytics forecasts a much faster rate of scrubber installations after 2020, once fuel oil prices have dropped and the economic advantages are more clear. The report forecasts as many as 1,000 vessels per year may install scrubbers after 2020.
Some in the industry have raised concerns about widespread non-compliance with the sulfur cap in 2020. The Platts Analytics report forecasts any non-compliance will have a limited impact on global bunker demand as the reputational risk of getting caught will be too high for most owners and operators to attempt it.