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


Palestinians in financial crisis after Israel, US moves

Updated 22 March 2019
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Palestinians in financial crisis after Israel, US moves

  • A Ramallah-based economics professor said the Palestinian economy more generally, remain totally controlled by and reliant on Israel
  • Israeli-Palestinian peace efforts have been at a standstill since 2014

RAMALLAH, Palestinian Territories: The Palestinian Authority faces a suffocating financial crisis after deep US aid cuts and an Israeli move to withhold tax transfers, sparking fears for the stability of the West Bank.
The authority, headed by President Mahmud Abbas, announced a package of emergency measures on March 10, including halving the salaries of many civil servants.
The United States has cut more than $500 million in Palestinian aid in the last year, though only a fraction of that went directly to the PA.
The PA has decided to refuse what little US aid remains on offer for fear of civil suits under new legislation passed by Congress.
Israel has also announced it intends to deduct around $10 million a month in taxes it collects for the PA in a dispute over payments to the families of prisoners in Israeli jails.
In response, Abbas has refused to receive any funds at all, labelling the Israeli reductions theft.
That will leave his government with a monthly shortfall of around $190 million for the length of the crisis.
The money makes up more than 50 percent of the PA’s monthly revenues, with other funds coming from local taxes and foreign aid.

While the impact of the cuts is still being assessed, analysts fear it could affect the stability of the occupied West Bank.
“If the economic situation remains so difficult and the PA is unable to pay salaries and provide services, in addition to continuing (Israeli) settlement expansion it will lead to an explosion,” political analyst Jihad Harb said.
Abbas cut off relations with the US administration after President Donald Trump declared the disputed city of Jerusalem Israel’s capital in December 2017.
The right-wing Israeli government, strongly backed by the US, has since sought to squeeze Abbas.
After a deadly anti-Israeli attack last month, Prime Minister Benjamin Netanyahu said he would withhold $138 million (123 million euros) in Palestinian revenues over the course of a year.
Israel collects around $190 million a month in customs duties levied on goods destined for Palestinian markets that transit through its ports, and then transfers the money to the PA.
Israel said the amount it intended to withhold was equal to what is paid by the PA to the families of prisoners, or prisoners themselves, jailed for attacks on Israelis last year.
Many Palestinians view prisoners and those killed while carrying out attacks as heroes of the fight against Israeli occupation.
Israel says the payments encourage further violence.
Abbas recently accused Netanyahu’s government of causing a “crippling economic crisis in the Palestinian Authority.”
The PA also said in January it would refuse all further US government aid for fear of lawsuits under new US legislation targeting alleged support for “terrorism.”

Finance Minister Shukri Bishara announced earlier this month he had been forced to “adopt an emergency budget that includes restricted austerity measures.”
Government employees paid over 2,000 shekels ($555) will receive only half their salaries until further notice.
Prisoner payments would continue in full, Bishara added.
Nasser Abdel Karim, a Ramallah-based economics professor, told AFP the PA, and the Palestinian economy more generally, remain totally controlled by and reliant on Israel.
The PA undertook similar financial measures in 2012 when Israel withheld taxes over Palestinian efforts to gain international recognition at the United Nations.
Abdel Karim said such crises are “repeated and disappear according to the development of the relationship between the Palestinian Authority and Israel or the countries that support (the PA).”
Israel occupied the Gaza Strip and the West Bank, including now annexed east Jerusalem in the Six-Day War of 1967 and Abbas’s government has only limited autonomy in West Bank towns and cities.
“The problem is the lack of cash,” economic journalist Jafar Sadaqa told AFP.
He said that while the PA had faced financial crises before, “this time is different because it comes as a cumulative result of political decisions taken by the United States.”
Abbas appointed longtime ally Mohammad Shtayyeh as prime minister on March 10 to head a new government to oversee the crisis.
Abdel Karim believes the crisis could worsen after an Israeli general election next month “if a more right-wing Israeli government wins.”
Netanyahu’s outgoing government is already regarded as the most right-wing in Israel’s history but on April 9 parties even further to the right have a realistic chance of winning seats in parliament for the first time.
Israeli-Palestinian peace efforts have been at a standstill since 2014, when a drive for a deal by the administration of President Barack Obama collapsed in the face of persistent Israeli settlement expansion in the West Bank.