Marine fuels: Price impact of new 2020 low sulfur regulations negated by refineries and Covid‐19

• Published date: 01 August 2020
• DOI: http://doi.org/10.1111/oet.12808
• Date: 01 August 2020

FOCUS

Marine fuels: Price impact of new 2020 low sulfur

regulations negated by refineries and Covid-19

New low-sulfur regulations on shipping fuels were

expected to push up bunkering costs this year and disrupt

markets, but new investment and blending from refiners,

combined with severe demand destruction from Covid-

19, has meant low sulfur products have only risen mod-

estly compared to High Sulfur Fuel Oil (HSFO), making

scrubber installation an expensive alternative so far.

International Maritime Organization (IMO) rules on

sulfur content in marine bunkering fuels were reduced to a

0.5% maximum globally (down from 3.5%) at the beginning

of this year. After an initial sharp rise at the beginning of

the year, low sulfur marine fuel prices have softened, and

premiums to HSFO have fallen from over $300/t in

January, to about $70/t by mid-June—which is well below

expectations. The impact on demand from Covid-19 has

had a significant effect as weaker global trade has reduced

demand for marine fuels generally, but other factors have

also contributed. Most importantly, refineries worldwide

have been able to lift very low sulfur fuel oil (VLSFO) yields

significantly by changing blending practices and investing

in more desulfurization capacity. Some have also cut sour

crude purchases (which yield a higher cut of VLSFO),

which provided support to sweet heavy grades early in the

year, although this has now eased (see below).

Refiners have diverted low sulfur blend-stocks to pro-

duce VLSFO—including low sulfur distillates, jet/kerosene

and vacuum gasoil (VGO).

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Low demand for gasoline this

year due to Covid-19, means fluid catalytic cracker feed-

stocks that would have gone to boost gasoline output, such

as VGO, can be diverted to the VLSFO bunker fuel pool as

blend-stock instead, which has helped push up VLSFO

supply.

Refiners are also processing more high sulfur feed-

stocks, primarily HSFO, using expanded desulfurization

capacity. The US Gulf Coast refining system and Indian

refining sector have both increased the refining of HSFO,

absorbing surpluses from the Russian refining system

and the Middle East. For example, ExxonMobil installed

new desulfurization capacity at its Beaumont, Texas,

facility in late 2019. The lower the sulfur level the higher

the cost of extraction, but refiners—in Europe and North

America at least—have already had experience of 0.1%

marine fuel sulfur limits under IMO Emission Control

Area (ECA) restrictions since 2015, when they were

reduced from 1%. Similarly, ultra-low sulfur diesel

(0.001% S) is already produced for the European onshore

vehicle market and elsewhere.

The focus on HSFO as a feedstock in the United

States has been further compounded by OPEC cuts, sanc-

tions on Venezuela and midstream constraints in

Canada, which has reduced the supply of medium and

heavy, sour crudes. In the Middle East, refineries are only

processing sour grades, and there is little VGO available

for blending, so the region has to import VLSFO.

Policy makers have also been supportive, with the

Chinese central government announcing in January a

long-awaited tax rebate scheme for Chinese VLSFO pro-

duction, which is helping boost sales and production in

Chinese bunkering markets. Beijing allocated its first

VLSFO export quotas in May, which has also helped with

supply to neighboring Asian markets.

Nevertheless, despite filling storage capacity in prepa-

ration for IMO 2020 compliance in the months before

regulations kicked in, the year still began with a spike for

VLSFO prices and premiums. Since then, like the rest of

the petroleum complex, fuel oil markets have weakened

amid demand uncertainty related to the Covid-19 pan-

demic and associated economic disruption. Global bun-

ker demand is set to fall 6% to 8% in 2020, according to

FGE oil markets, and the main bunkering ports posted

sharp year-on-year declines in bunkering demand in the

second quarter. In July, a recovery in Asian refining runs

and reduced fuel oil feeds for other oil products contin-

ued to maintain ample VLSFO supply.

1|FLEXIBLE HUBS

With plentiful VLSFO available from nearby advanced

refineries, IMO 2020 has enabled major bunkering hubs,

such as Singapore and Fujairah, to gain market share at

the expense of ports like Hong Kong due to the availabil-

ity and reliability of VLSFO supply. All bunker suppliers

in Singapore were able to provide compliant fuels at the

beginning of the year, and a number of suppliers also

continued to supply HSFO to ships with scrubbers.

DOI: 10.1111/oet.12808

Oil and Energy Trends. 2020;45:3–15. wileyonlinelibrary.com/journal/oet © 2020 John Wiley & Sons Ltd 3