IMO 2020 series: After the storm

Author Matt Wright and James Fernandes, Consulting Services; Oil Products team

Preparing for the challenges and opportunities presented by IMO 2020 has narrowed the market focus on early next year. But there is plenty to keep an eye out for after the sulphur cap comes into effect and over the following years.

In the final blog in the series we look at when the market will return to an equilibrium and what to start planning for. As we addressed in the previous four blogs, the next few months is expected to cause significant disruption to shipping and refining markets. But we do expect the market to return to an equilibrium. This could take up to five years however, and the HSFO crack is likely to remain permanently below pre-IMO levels.

On the pricing side, the largest impact of IMO 2020 will be on HSFO. We expect the crack in NWE could fall as low as $30/bl below North Sea Dated early in 2020.

As discussed in blog one, power generation is expected to absorb the majority of excess HSFO after it can no longer be used by vessels without a scrubber. The HSFO crack will remain weak as long as power generation remains the price setting market. How long this persists for will be dictated by how quickly refiners invest in residue destruction and desulphurisation in order, reducing production and how many more scrubbers are ordered, increasing demand. We expect there to be a reaction from both sides, which will steadily lift the HSFO crack over the next five years. If scrubber orders rise quickly, this timeframe could be shorter.

HSFO demand will creep back up in the coming years as more scrubbers are installed. But we don’t expect scrubber uptake to reach a level where HSFO demand makes a full come back. Orders will slow once the HSFO price rises past a point that justifies the investment. The introduction of very low sulphur fuel oil (VLSFO) bunker grades will also ensure that the market share for HSFO never returns to pre-IMO levels.

The remainder of demand will be met by marine gasoil (MGO). While expected to be favoured early on, as a higher priced product, MGO demand will fall once the concerns around compatibility are answered.

It is therefore likely that shipping is set for a multi-fuel future. Included in this is LNG. Interest in LNG bunkering has lagged exhaust scrubbers mainly because of the higher cost to retrofit vessel engines, the space LNG tanks take aboard ship and the lack of LNG bunkering infrastructure at many international ports. There are fewer than 200 LNG-fuelled vessels, excluding LNG carriers, available today. Commissioned vessel retrofits and vessel newbuilds would more than double the number of LNG-burning vessels.

Using LNG as a marine fuel reduces carbon dioxide and nitrogen oxide emissions and nearly eliminates sulphur oxides and particulate matter compared with vessels burning fuel oil or MGO. Their interest has been fuelled by the widening of the LNG discount to MGO on the back of weaker LNG prices.

Once the industry made its way through 2020 it could be heading into another challenging period. A range of economic indicators show global trade activity slowing. If GDP growth slows further, seaborne trade is likely to fall. Many continue to fear that outright recession is just around the corner.

Global trade indicators: Year on year change

IMO 2020 series: After the storm

Changes in trade flows could boost trade in some sectors. We expect crude flows to increase in the coming years, boosted by rising exports from the US. Therefore, despite slowing global crude demand growth, the volume on the water could keep growing for longer.

For refiners looking to invest to manage their HSFO exposure, there is the additional challenge of looming peak demand. Refined products demand in NWE and North America is set to peak in the next two years, with global demand forecasts to begin declining from about 2032 onwards. This is not an immediate threat, but it will be increasingly difficult to secure investment for an upgrade programme where there is limited new incremental growth and all new supply will need to take market share from elsewhere.

IMO 2020 has been all about sulphur emissions. But future regulations on the emission of nitrogen oxides and greenhouse gases are already on the agenda at the IMO. For shipowners who have installed sulphur scrubbers, this won’t be welcome news. But this could be what drives more shippers to LNG in the future.

For the latest news, insight and market activity related to the IMO’s 0.5% sulphur cap, you can sign up for our free bi-weekly newsletter.

The forward-looking data and analysis contained within this blog comes from the Argus Consulting team, who publish the Argus Marine Fuels Outlook. This is a quarterly service that provides news and insight, market fundamentals data and price forecasts for global marine fuels two years ahead.