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Trade tariffs seen muting IMO 2020 impact for US refiners

New York — Weakening export demand for US-made products is skewing the impact of the change to cleaner ship fuel on US refined products as marine gasoil prices fall and cracks widen ahead of the IMO's mandated January 1, 2020, deadline to reduce sulfur content to 0.5% from 3.5% .

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The imposition by the Trump Administration of tariffs on China is having an impact on port activity, and the slowing of global trade and US exports is keeping distillate prices below where US refiners thought they would be just under four months before the deadline imposed by the International Maritime Organization.

Fewer US products are making their way abroad, according to container export data from the ports of Houston, Long Beach, California, and New York and New Jersey.

This lack of US exports and resulting weak economic growth are helping push down the price of marine gasoil, the current go-to fuel for ship owners ahead of the deadline mandated by the International Maritime Organization for IMO 2020 deadline.

Regardless, the heady refining margins expected by US refiners has yet to materialize, although most feel it is on the horizon as the deadline draws near.

"We are starting to see movement, albeit relatively light," said Tom Nimbley, CEO of PBF Energy on the August 1 second quarter results call.

"We expect to see even more activity as we approach the fourth quarter, and January 1, 2020 does put a line in the sand."

However, other factors have come into play which are also keeping the price spread between cleaner fuel and heavier fuel narrower than expected.

US REFINERS RESPOND TO DEMAND FOR 3.5% SULFUR FUEL

US demand for residual fuel rose 141,000 b/d to 457,000 b/d for the week ended August 16, according to Energy Information Administration data, contrary to the fall of in demand for gasoline and other distillates.

The current 3.5%S spec bunker fuel oil falls into the residual fuel category and the wider differentials along the USGC have made ship owners loathe to switch to cleaner fuel before they have to in order to capture better economics and refiners to stop making it.

Nimbley calls demand for high sulfur fuel a "conundrum," adding the "incentive to start making changes [for refiners] is going to pushed back for as long as they think than continue to have a market" for 3.5%S fuel oil.

USGC residual fuel production averaged 163,000 b/d on the week, up from 151,000 b/d, while US West Coast refiners also upped their residual fuel output to 126,000 from the 97,000 b/d produced a week earlier, EIA data showed.

On the US Atlantic Coast, EIA data showed residual fuel output rose to 46,000 b/d for the week from the 27,000 b/d the week earlier, despite the shutting down of the region's largest refinery, the 335,000 b/d Philadelphia Energy Solutions plant.

SHIP OWNERS TESTING NEW FUELS

With an eye to the future, however, ship owners are already trying out the newly patented fuels by companies such as ExxonMobil and Shell and other refiners and traders.

PBF Energy's midstream master limited partnership, PBF Logistics, said its agreement to supply shipper A.P. Moller-Maersk with low sulfur bunker fuel will start in October, two months earlier than anticipated. PBF will supply the shipper with the equivalent of 1.25 million mt, or 9.4 million barrels, of IMO-compliant 0.5% sulfur fuel, which is about of 10% of Maersk's annual fuel demand.

US refiners are also upping their processing of feed stocks as they formulate on-spec bunker fuels.

For the week ended August 16, crude inputs averaged 17.7 million b/d, EIA data showed, down from the 17.9 million b/d the week earlier, despite an increase in refinery utilization to 95.9% from 94.8%.

USGC refiners processed about 600,000 b/d of feed stocks in the past two weeks, and VGO or vacuum gas oil is a considered a prime candidate to be blended into the transportation pool to make lower sulfur bunker fuel.

Vacuum gas oil, or VGO, is a feedstock from vacuum distillation units. It is already used to feed gasoline-making fluid catalytic cracking units. Expectations are for gas margins to rise once the January 1 deadline hits as higher margins for bunker pull the VGO from the gasoline pool into the bunker pool.

The futures market is as slow as physical trade to embrace the change, but European and Asian companies are beginning to move forward.

Activity on Platts 0.5% Marine Fuel contracts began to pick up in July outside of the US. As of late Tuesday, volume on CME's Platts Micro European FOB Rotterdam Marine Fuel 0.5% Barges was 196 contracts, with 90 of the contracts for November 2019. Volume on the CME Mini Singapore FOB Marine Fuel 0.5% d contract was 366 contracts, with 22 for November, 47 for December and 29 for January.

-- Janet McGurty, janet.mcgurty@spglobal.com

-- Edited by Derek Sands, newsdesk@spglobal.com

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