It has been estimated that the new IMO rules will apply to 3.5 million barrels per day of high-sulfur fuel oil, although post combustion gas scrubbers may allow some vessels to continue using the high-sulfur fuel. Most marine vessels will have to switch to cleaner distillate fuels like low-sulfur diesel, which will increase demand significantly.
As with the previous USLD switch, the new regulations will increase the cost to produce marine fuel, and it will again put upward pressure on the price of sweet crudes and downward pressure on sour crudes.
Refineries are certainly gearing up for the increase in diesel demand. But given the time, complexity, and expense of increasing capacity to meet the new demand, it is possible that there will be insufficient supplies when the new specifications come into effect.
EnSys Energy and Navigistics Consulting conducted a Marine Fuel Availability Study in which they conclude that there are significant risks leading up to the transition. Specifically, they note that installation of exhaust gas scrubbers has been lower than expected. They also project that there will be a “Scramble” period where refineries that aren’t equipped to process sour crude will bid up the price of light sweet crude that can enable them to meet the lower sulfur specifications.
In any case, it seems certain that diesel prices are set to rise, and perhaps significantly. Low sulfur crudes like West Texas Intermediate (WTI) will likely see demand spike as well. Yet you can buy WTI today for February 2020 delivery for $64.19/bbl, which is more than $4/bbl cheaper than the current price.
History suggests that discount won’t last.
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