IMO 2020 redefines oil market dynamics
Richard Price
02-Dec-2019
LONDON (ICIS)–The disruptive International Marine Organisation (IMO) 2020 shipping fuel regulation has triggered a shift in oil market fundamentals, increasing the desirability of low sulphur, sweeter crudes with the ability to be blended into the low sulphur fuel oil pool. As a result, the discount of sour to sweet crude has widened to 18-month highs, presenting refiners with both challenges and opportunities.
The IMO announced in 2016 that from 2020 onwards, only marine fuels with a sulphur content below 0.5% could be used in shipping, unless sulphur scrubbing facilities were installed. This has sent shockwaves up the crude oil value chain, where downstream demand for low sulphur IMO compliant fuel is driving unprecedented shifts in physical crude market dynamics.
A CHANGING
ENVIRONMENT
It’s been a record
breaking month for much of the global sweet
crude complex, with grades such as Algeria’s
Saharan Blend and Azerbaijan’s Azeri Light
seeing increased demand from refiners. Azeri in
particular has been a stand out grade, its
distillate rich yield and low sulphur content
have propelled it to all-time highs. This
support is likely to continue, with grades
yielding large volumes of compliant marine
fuels highly profitable in the current climate.
Meanwhile, sour differentials have languished on slumping demand, as refining margins nosedive to multi-year lows. The crack spread for refining a barrel of Urals in the Mediterranean recently fell to its lowest since the turn of the century, forcing some buyers to turn elsewhere. It’s understood that refiners are now looking to grades such as Libya’s Sharara, or further afield such as Midland from the US.
The shift in market dynamics to favour sweeter crude can be seen on a regional scale within the North Sea basket. Ekofisk, with a sulphur content of around 0.27%, is beginning to out-compete the sourer Forties and Brent Blend.
This IMO-fuelled divergence is also apparent on a global scale, as shown by the sweet-sour basket spread hitting its widest since March 2018 this week. The spread reflects trends in the wider crude market, with each basket containing crude from different regions.
POTENTIAL GASOLINE
SHORTAGE
There are concerns that
the current inclination of refiners to optimise
production IMO compliant fuels may lead to a
shortage of gasoline in the coming months.
Heavier fractions of the barrel, such as vacuum
gasoil (VGO), can go through a fluid catalytic
cracker (FCC) in order to generate lighter
hydrocarbons, such as gasoline and low sulphur
fuel oil. Due to the impending marine fuel
regulation, refiners are gearing their FCC’s
greater yields of low sulphur fuel oil,
tempering gasoline supply.
This could apply further tailwinds to lighter, high naphtha and gasoline yielding crude oils such as Saharan by further supporting refining margins.
GLOBAL IMPACT
The
regulation is set to have an impact on spreads
between benchmark grades such as Brent (BFOE),
Dubai and WTI across the globe, both
exacerbating and limiting arbitrage plays. The
Brent-Dubai spread marks the difference between
the sourer Dubai and the sweeter Brent
benchmarks. European crude is
Brent-denominated, whilst the Middle East is
priced off Dubai.
ANALYST’S VIEW
The
BFOE-Dubai spread has taken an unusual pattern
this year, with the typically positive spread
turning negative in the early months of 2019,
driven by the OPEC+ production cuts agreement
as well as reduction of sour crude supply from
countries such as Iran, Venezuela and Canada at
various points in the year. The impact of the
new IMO regulation on the BFOE-Dubai spread
will be substantial in the near future, as
demand for sour Dubai and related crudes will
wane somewhat as simple refineries purchase
more low sulphur crude to allow production of
VLSFO. The value of this change will depend on
the outcome of the next OPEC+ meeting in early
December – should the alliance agree to cut
production further than their current
agreement, it will likely mitigate the widening
effect of IMO on the spread. – Ajay
Parmar, Senior Analyst – ICIS
The increasing discount of Dubai crude to BFOE will make European grades more expensive to buyers in Asia relative to Middle Eastern crudes. This could dent demand for European crude in the long-term, keeping a ceiling on differentials.
Thumbnail picture source: MOHAMED HOSSAM/EPA-EFE/Shutterstock
Global News + ICIS Chemical Business (ICB)
See the full picture, with unlimited access to ICIS chemicals news across all markets and regions, plus ICB, the industry-leading magazine for the chemicals industry.
Contact us
Partnering with ICIS unlocks a vision of a future you can trust and achieve. We leverage our unrivalled network of industry experts to deliver a comprehensive market view based on independent and reliable data, insight and analytics.
Contact us to learn how we can support you as you transact today and plan for tomorrow.