Armageddon is one month away and oil prices are set to go up
Link copied to
In one month international shipping will need to make a fundamental change in how it’s fuelled, from high to low sulphur fuels, resulting in what one academic has called “Armageddon”.
The International Maritime Organisation (IMO) changed the rules in 2016, requiring all ships to use marine fuels with a sulphur content no greater than 0.5 per cent.
The current content is 3.5 per cent. If they want to keep using high sulphur, fuel ships must have retrofitted on-board scrubbers or switch to LNG.
The deadline is January 1, 2020.
This means a large change in the type of oil needed to make the fuel that powers the global shipping industry to light sweet crude, creating a lift in demand by refineries and a price bump as supplies of light sweet are squeezed.
MIT economist Philip Verleger speculated in a paper last year the shipping industry’s unpreparedness could lead to $US200 ($295) oil and “an economic crash of horrible proportions in 2020… [for] want of low-sulfur diesel fuel”. He called it the “Armageddon” scenario.
A Stockhead analysis in May found that 19 ASX companies produce the light sweet crude that will be in demand by refineries looking to service global shippers.
Wood Mackenzie analyst Gavin Thompson says shipping currently uses 3.5 million barrels per day or so of high sulphur fuel oil, and expects that to drop suddenly in January to 1.3 million barrels per day.
“Globally we believe that refiners can deliver something like 1.4 million b/d of <0.5 per cent VLSFO [very low sulphur fuel oil] next year. To achieve this, refiners will maximise the production of VLSFO – either by segregation of intermediate product streams or by segregation of crudes and running their crude units in batch mode,” he said in a research note.
“To supply the 1 million b/d of additional MGO for shipping, refiners will need to run an additional 1.7 million b/d of crude to meet this higher gasoil demand.
“This inevitably affects prices and margins for both crude feedstocks and refined products.
“Recent price volatility following the September 14 attacks in Saudi Arabia has blurred the impending impact of IMO 2020 to some extent, but I think we can expect widening differentials between both sour and sweet crudes and diesel and fuel oil through December and into 2020.”