EIA cuts estimated IMO impact on US diesel margins

The International Maritime Organization's (IMO) tighter sulphur restrictions on marine fuels this year will have a smaller-than-expected upward lift in wholesale diesel margins, according to the US Energy Information Administration (EIA).

The EIA revised down its forecast of diesel wholesale margins to an average of 50¢/USG in 2020 in its January Short-Term Energy Outlook report, down from its December forecast of 57¢/USG. Both projections mark an increase from 2019's average of 43¢/USG. The main cause of the increase in margins remain attributed to IMO's regulation.

The EIA also revised down its forecast for diesel wholesale margins to peak at 53¢/USG, instead of the December forecast of 61¢/USG.

The lower forecast echoes the muted response to IMO in the diesel spot market so far. Although it has only been two weeks into the new year, many shipowners switched to 0.5pc sulphur IMO-compliant fuels ahead of the 1 January 2020 deadline. Some of the refinery adjustments previously anticipated have likely been implemented well ahead of the deadline as well.

But so far, US diesel markets have seen minimal uplift from the IMO sulphur cap. Gulf coast Colonial pipeline diesel — a benchmark for the country — averaged 23.4¢/USG against Western Canadian Select crude prices in Houston in the 1-14 January period. This crack spread was up only marginally from an average of 22.8¢/USG during the same period in 2019.

Implied domestic diesel demand fell to 3.2mn b/d as of 10 January, almost 40pc lower than the same week last year, according to EIA statistics. Gulf coast ultra-low sulphur diesel inventories rose to 39.6mn bl during the same week, the highest level in more than two years.

The closest market to diesel that has seen a big IMO push is feedstocks, including low-sulphur straight run, atmospheric bottoms, and vacuum gasoil (VGO).

A lot of VGO — particularly grades with low paraffins and density between 18-22° API — has been drawn into the bunker fuel blending pool since last fall, given the higher margins there.

This has left less VGO as feedstocks for fluid catalytic crackers (FCC) or hydrocrackers, units that produce gasoline and diesel. But not enough feedstock has been diverted away from gasoline and diesel production to raise margins by as much as previously expected by some.

In fact, the markets for refined products have been so weak that some Gulf coast refiners were reported to be cutting FCC run rates ahead of the planned spring turnarounds.

by Chunzi Xu and Daphne Tan