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.”

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Davos organizer WEF warns of growing risk of cyberattacks in Gulf

Updated 29 min 10 sec ago
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Davos organizer WEF warns of growing risk of cyberattacks in Gulf

  • Critical infrastructure such as power centers and water plants at particular risk, says expert
  • Report finds that unemployment is a major concern in Bahrain, Egypt, Morocco, Oman and Tunisia

LONDON: The World Economic Forum (WEF) has warned of the growing possibility of cyberattacks in the Gulf — with Saudi Arabia, the UAE and Qatar particularly vulnerable.

Cyberattacks were ranked as the second most important risk — after an “energy shock” — in the three Gulf states, according to the WEF’s flagship Global Risks Report 2019.

The report was released ahead of the WEF’s annual forum in Davos, Switzerland, which starts on Tuesday.

In an interview with Arab News, John Drzik, president of global risk and digital at professional services firm Marsh & McLennan said: “The risk of cyberattacks on critical infrastructure such as power centers and water plants is moving up the agenda in the Middle East, and in the Gulf in particular.”

Drzik was speaking on the sidelines of a London summit where WEF unveiled the report, which was compiled in partnership with Marsh and Zurich Insurance.

“Cyberattacks are a growing concern as the regional economy becomes more sophisticated,” he said.

“Critical infrastructure means centers where disablement could affect an entire society — for instance an attack on an electric grid.”

Countries needed to “upgrade to reflect the change in the cyber risk environment,” he added.

The WEF report incorporated the results of a survey taken from about 1,000 experts and decision makers.

The top three risks for the Middle East and Africa as a whole were found to be an energy price shock, unemployment or underemployment, and terrorist attacks.

Worries about an oil price shock were said to be particularly pronounced in countries where government spending was rising, said WEF. This group includes Saudi Arabia, which the IMF estimated in May 2018 had seen its fiscal breakeven price for oil — that is, the price required to balance the national budget — rise to $88 a barrel, 26 percent above the IMF’s October 2017 estimate, and also higher than the country’s medium-term oil-price target of $70–$80.

But that disclosure needed to be balanced with the fact that risk of “fiscal crises” dropped sharply in the WEF survey rankings, from first position last year to fifth in 2018.

The report said: “Oil prices increased substantially between our 2017 and 2018 surveys, from around $50 to $75. This represents a significant fillip for the fiscal position of the region’s oil producers, with the IMF estimating that each $10 increase in oil prices should feed through to an improvement on the fiscal balance of 3 percentage points of GDP.”

At national level, this risk of “unemployment and underemployment” ranked highly in Bahrain, Egypt, Morocco, Oman and Tunisia.
“Unemployment is a pressing issue in the region, particularly for the rapidly expanding young population: Youth unemployment averages around 25 percent and is close to 50 percent in Oman,” said the report.

Other countries attaching high prominence to domestic and regional fractures in the survey were Tunisia, with “profound
social instability” ranked first, and Algeria, where respondents ranked “failure of regional and global governance” first.

Looking at the global picture, WEF warned that weakened international co-operation was damaging the collective will to confront key issues such as climate change and environmental degradation.