Marpol sulfur cap will widen sweet, sour spreads

Sweet and sour spreads for crude oil and refined products are expected to widen significantly as a result of global marine fuel sulfur caps set to take effect in 2020.

The International Maritime Organization (IMO) will cap the sulfur content of fuel at 0.5pc, down from 3.5pc today, in January 2020. Vessels can install scrubbers to clean exhaust gases, convert to LNG or switch to lower-sulfur diesel to comply with the International Convention for the Prevention of Pollution from Ships (Marpol).

Over 3mn b/d of high-sulfur fuel oil (HSFO) demand will need to be replaced by other sources, according to Argus estimates discussed at theArgus Marpol Strategy Summit in Houston today.

The rules will dramatically boost the premium that sweet crude and refined products carry versus their heavier, more sour counterparts.

Spot prices for Mexican heavy sour Maya and other crudes containing more than 3pc sulfur, like Western Canadian Select (WCS), are forecast to plummet to discounts to light sweet North Sea Dated as wide as $30/bl in 2020, Argus consulting data shows. US medium sour Mars, which has a 1.81pc sulfur content, is expected to reach a roughly $10/bl discount to North Sea Dated.

"Spreads are going to widen. The real question is for how long," Argus senior consultant Edward Arnold said. Meanwhile sweeter crudes like Nigerian Bonny Light and Algerian light sweet Saharan Blend could draw wider premiums, he said.

Only 10.4mn b/d, or just 13pc of global crude oil production, comprises medium and heavy sweet crudes, while over 35pc is medium sour, he said.

Maya stood yesterday at a $14.59/bl discount to North Sea Dated. WCS at Houston, Texas, was assessed at a $9.83/bl discount to Dated, and Mars was trading at a $5.67/bl discount to the European light sweet crude marker.

Arnold's projection indicates spot prices would recover to near their current levels between 2020 and 2026 amid a "slow and steady" increase in investments made into scrubbers, which would allow ships to remove sulfur from emissions.

Light sweet crude prices are expected to increase during that time frame, as refiners turn toward feedstock that would produce more low-sulfur distillates to meet rising demands. Complex refiners with coking and other abilities to run heavier, higher-sulfur inputs will be in a competitive position, Arnold said.

Some refiners are considering blending low-sulfur vacuum gasoil (VGO) into the fuel oil pool to produce 0.5pc bunker fuel while potential shutting down some gasoline-production through fluid catalytic cracking. This could dramatically decrease US gasoline supply with a knock-on impact on gasoline and diesel prices, Arnold said.

The reduction in the amount of VGO being cracked to produce gasoline and light ends such as naphtha will tighten supplies, supporting spot prices for light products.