Shifts in Marine Fuel Oil Demand Looming
The 2020 deadline on the implementation of low sulphur marine fuels is already shifting things around in the shipping market, although up until now, most shipowners, in Hellas at least, are shying away from any major changes in their fleet, until they get a better grasp of things. In its latest weekly report, shipbroker Gibson expressed the view that scrubbers are difficult to be seen as a long-term solution compliance-wise. “Much debate has raged over how shipowners will fuel their vessels come 2020 when the IMO mandated 0.5% sulphur cap comes into force. We have discussed this at length and maintain our view that scrubbers will only play a minor role by the implementation date. With that view in mind, there will be a significant demand shift across the barrel in less than two years’ time. Fuel oil trade will be fundamentally affected”, Gibson said.
According to the shipbroker, “this week the IEA released its influential ‘Oil 2018’ report, which analyses oil market developments to 2023. This is the first edition of the report to be released since the IMO committed to the 1st of January 2020 implementation date. The IEA has thus been forced to offer their view of how the market will evolve. Come 2020, the agency expects a near 1 million b/d swing from high sulphur fuel oil (HSFO) to marine gasoil (MGO). Interestingly, the IEA have assumed a large uptake in a new 0.5% fuel oil blend, named very low sulphur fuel oil (VLSFO), which they estimate will take nearly another 1 million b/d of demand away from HSFO. The result is of course, a near 2 million b/d decline in HSFO demand”.
According to Gibson, “for tankers in the fuel oil trade this may of course seem alarming to see such large volumes of fuel oil demand stripped from the market. Yet, VLSFO will be carried on dirty tankers, reducing the demand shift to clean from dirty products to 1 million b/d. Furthermore, the IEA estimate that from 2020 to 2023, VLSFO will claw back market share from MGO, with eventual VLSFO demand of approximately 2 million b/d, complimented by 1 million b/d of ‘scrubbed’ (or non-compliant?) HSFO demand. In effect, this returns the clean/dirty bunker demand split to where it was prior to 2020, but with VLSFO having taken share from HSFO”.
The shipbroker added that “the IEA also reveals interesting insights into where the surplus HSFO might go, which of course has implications for trade flows. They estimate that spare capacity in the power generation sector could absorb nearly 0.5 million b/d of HSFO demand, predominantly to destinations in the Middle East and Africa which would support longer voyages. Furthermore, by considering HSFO and VLSFO as dirty products, the total market share lost to MGO is just under 1 million b/d, which is likely to be reduced to 0.5 million b/d when new sources of demand, (i.e. power generation) are considered. Over time refinery upgrades will gradually come online, suggesting more VLSFO will be produced at the expense of HSFO. Assuming compatibility issues are overcome by this stage, higher availability of VLSFO should support a demand shift from MGO to VLSFO. In time this would see the volume of dirty bunker fuel cargoes being transported on tankers move close to pre-2020 levels”, Gibson noted.
“Further, if refiners are to invest in upgrading capacity, and if sufficient volumes of VLSFO will eventually be produced, what are the longer-term benefits of the scrubbers? Will the spread between VLSFO and HSFO be enough to make the investment viable in the longer term? Undoubtedly, the short repayment horizon would appear to make scrubbers effective for those who install them ready for 2020. But, as time progresses post-2020, the spread between MGO and HSFO is likely to narrow, whilst refinery upgrades could see HSFO supply tighten, Gibson concluded.
Nikos Roussanoglou, Hellenic Shipping News Worldwide