Traders set to cash in as shipping fuel shake-up adds $30bn to bill

Complex refineries and oil traders will be the winners when global regulations cut the limit for sulfur in marine fuels from 2020. (Reuters)
Updated 03 November 2018
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Traders set to cash in as shipping fuel shake-up adds $30bn to bill

  • Oil traders are gearing up to cash in on big disruptions that could hit the shipping fuel market
  • IMO regulations will cut the limit for sulfur in marine fuels globally from 3.5 percent to 0.5 percent from the start of 2020

LONDON: The world’s biggest oil traders are gearing up to cash in on big disruptions that could hit the shipping fuel market in just over a year due to new UN-mandated environmental rules.
International Maritime Organization (IMO) regulations will cut the limit for sulfur in marine fuels globally from 3.5 percent to 0.5 percent from the start of 2020.
“We’re going to hopefully facilitate the new rules in 2020 by helping out the industry and participants to have a smooth transition,” Marco Dunand, CEO of trading house Mercuria, told the Reuters Global Commodities Summit.
He said Mercuria was in talks with finance shipowners who want to install expensive sulfur cleaning kits called scrubbers, allowing them to burn cheaper high-sulfur fuel. He declined to name those clients.
The company is offering a package that would include providing compliant fuels via its subsidiary Minerva as well as fuel-price hedging.
Traders are widely expected to benefit as they thrive off efficiently moving products between regions with price dislocations.
But the market lacks a benchmark for the new compliant fuel grade. “There are legitimate concerns about this product being available in multiple locations,” Vitol Group CEO Russell Hardy told the summit.He said that planning for the changes in the absence of a futures market was complicating matters. “It’s doable, but we would like a bit of transparency,” he said.
While S&P Global Platts, the agency that publishes benchmark physical fuel oil price assessments, plans to launch a set of new 0.5 percent sulfur prices in January, a paper market does not yet exist.
“I think it will be a bit chaotic in the beginning of 2020 ... (but) we don’t think it’s going to be extremely disruptive,” Gunvor CEO Torbjorn Tornqvist said.
Other winners from the changes will be complex refineries that have invested in the right kit to turn high-sulfur products into low-sulfur, or sweet, ones. This leaves simple refiners that can’t easily clean sulfur from petroleum products at a risk of losing out.
Shipowners, on the other hand, could be facing an extra $30 billion in fuel costs in 2020, according to a base case scenario from consultancy Wood Mackenzie. This compares with a total global shipping fuel bill of roughly $100 billion today.
Vitol sees 3,000-4,000 scrubbers installed around the 2020 implementation date, a number that means high-sulfur, or heavy, fuel oil is expected to remain in demand. Vitol has opted to install scrubbers on its bigger ships.
“It’s not the amount of scrubbers you do, but on which ships because the majority of bunker fuel that is consumed today goes on 20-30 percent of the global fleet,” Tornqvist said.
As such, Gunvor, which has also invested in some scrubbers, believes there will still be demand for heavy fuel oil, as scrubber uptake increases through 2020 and 2022.
Vitol expects around 750,000 barrels per day (bpd) of middle distillates to go into the 3 million bpd bunker pool to make the new product. That equates to about
2.5 percent of the entire 30 million bpd distillates market, Hardy said. He added this transition could be achieved with the right price incentives.
Tornqvist said the future price difference of around $40 a barrel between gasoil and heavy fuel oil gave “an extreme incentive to install a scrubber.”

FASTFACTS


Global oil demand under threat from cleaner fuel

Updated 14 November 2018
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Global oil demand under threat from cleaner fuel

  • Oil demand is not expected to peak before 2040, the Paris-based IEA said in its 2018 World Energy Outlook
  • The IEA’s central scenario is for demand to grow by about 1 million bpd on average every year to 2025

LONDON: Electric vehicles and more efficient fuel technology will cut transportation demand for oil by 2040 more than previously expected, but the world may still face a supply crunch without enough investment in new production, the International Energy Agency (IEA) said on Tuesday.
Oil demand is not expected to peak before 2040, the Paris-based IEA said in its 2018 World Energy Outlook. The IEA’s central scenario is for demand to grow by about 1 million barrels per day (bpd) on average every year to 2025, before settling at a steadier rate of 250,000 bpd to 2040 when it will peak at 106.3 million bpd.
“In the New Policies Scenario, demand in 2040 has been revised up by more than 1 million bpd compared with last year’s outlook, largely because of faster near-term growth and changes to fuel efficiency policies in the United States,” the agency said.
The IEA believes there will be about 300 million electric vehicles on the road by 2040, no change on its estimate a year ago. But it now expects those vehicles will cut
demand by 3.3 million bpd, up from a previous estimated loss of 2.5 million bpd in its last World Energy Outlook.
“Efficiency measures are even more important to stem oil demand growth: Improvements in the efficiency of the non-electric car fleet avoid over 9 million bpd of oil demand in 2040,” the IEA said.
Oil demand for road transport is expected to reach 44.9 million bpd by 2040, up from 41.2 million bpd in 2017, while industrial and petrochemical demand is forecast to reach 23.3 million bpd by 2040, from 17.8 million bpd in 2017.
All global oil demand growth will stem from developing economies, led by China and India, while demand in advanced economies is expected to drop by more than 400,000 bpd on average each year to 2040, the IEA said.
The IEA, which advises Western governments on energy policy, maintained its forecast for the global car fleet to nearly double by 2040 from today, growing by 80 percent to 2 billion.
On the supply side, the US, already the world’s biggest producer, will dominate output growth to 2025, with an increase of 5.2 million bpd, from current levels of about 11.6 million bpd. From that point onwards, the IEA expects US oil production to decline and the market share of the Organization of the Petroleum Exporting Countries (OPEC) to climb to 45 percent by 2040, from closer to 30 percent today.
New sources of supply will be needed whether or not demand peaks, the agency said.
“The analysis shows oil consumption growing in coming decades, due to rising petrochemicals, trucking and aviation demand. But meeting this growth in the near term means that approvals of conventional oil projects need to double from their
current low levels,” IEA director Fatih Birol said.
“Without such a pick-up in investment, US shale production, which has already been expanding at record pace, would have to add more than 10 million bpd from today to 2025, the equivalent of adding another Russia to global supply in seven years, which would be a historically unprecedented feat.”