IMO 2020 Questions Arise
November 1st, 2019
In the last week I have had several questions asked about IMO 2020. This new rule which takes effect January 1, 2020 has been talked about for some time now. Despite the industry coverage of this over the last couple years many still seem unaware as the January 1, 2020 deadline approaches. There are still many unknows and a lot more questions than answers, so I just want to give a quick overview and update here this morning.
IMO 2020. The International Maritime Organization (IMO) which regulates global shipping will roll out new regulations on January 1, 2020 to reduce the sulfur continent in fuels used by shipping vessels. The IMO is set to reduce the maximum amount of sulfur content (by percent weight) in marine fuels used on the open seas from 3.5% to 0.5%. The intent of this ruling is to reduce sulfur dioxide, nitrogen oxides, and other pollutants from global ship exhaust.
Why do we even care? The reason is that many analysts have estimated that there will not be enough Low Sulfur Fuel to satisfy the needs for shipping companies so demand will spill over into the Ultra Low Sulfur Diesel Fuel (ULSD) supplies to satisfy the demand. Who uses ULSD? You do, as well as, trucking, the railroads, mining and a host of others. So, if the shipping industry comes over into the pool of supplies that you use that means there is less for you and tighter supplies could drive up prices.
The energy market has currently been trying to determine how supplies match up with demand. Supplies are on the low end of the average range for this time of year but the outlook for demand going forward is widely debated topic. The outlook for demand is highly related to the global economic outlook and the China and US trade war is a big part of that outlook. If the global economy is slowing down, then the global demand for energy will also be going down. What the market is trying to figure out is will the decline in energy demand be enough to offset low supply and not create a supply crunch.
Some market analyst already think the impact of IMO 2020 is priced into the market and other see a much more dire situation. The truth is very likely somewhere in the middle.
What do you do? There are available options if you want to hedge yourself against any possible issues as these new IMO 2020 rules come into effect. Buy now and fill up your tanks to ensure you have product available when you need it. If you are concerned that prices could be going higher then lock in a forward fixed price contract to give yourself price protection. You can do this for what every length of time that you have concerns, a couple moths, six months, all next year. Conservative protection on some portion of your fuel needs is never a bad idea as you try to level out the highs and lows of the volatile energy market and strive to keep your cost within your budget.