IMO 2020 Could Disrupt Distillate Markets
April 12, 2019
Written By Tim Danze
The International Maritime Organization (IMO), which regulates global shipping, is set to roll out new regulations at the start of next year to reduce sulfur content in fuels used by shipping vessels. You may be wondering what bearing oceanic cargo ships have on a farm cooperative here in the Midwest and why you should care. No one quite knows yet, but there’s a chance the change in the fuel specification for ocean-going ships could reverberate across the supply chain and influence the market for on-road diesel.
President Trump’s Council of Economic Advisors (CEA) mentioned the impending change to maritime fuel regulations in its annual report, noting the new policy could create supply shortfalls that “will likely trigger higher prices, though estimates of price shocks to fuels, including diesel, gasoline, and jet fuel, vary substantially.”
Most cargo ships currently run on high-sulfur residual fuel oil, which is also known as bunker oil. Compliance with the new IMO sulfur restrictions is expected to increase demand of middle distillates, which would tighten the market for similar grades of petroleum products like diesel.
The CEA report projects a shortage of 200,000 to 600,000 barrels per day of IMO-compliant fuel. That’s the equivalent of 8,400,000 to 25,200,000 gallons per day that will need to come from other parts of the distillate pool to satisfy those needs.
A recent bulletin from S&P Global gives a broader view of how these changes will impact a wide variety of markets: “IMO 2020 is but one example of how the global energy system is becoming more interconnected, as the change in bunker specification will not just impact refining and seaborne shipping, but domestic road fuel, railroad rates, coal pricing, and electric generation fuel mix.”
The U.S. Energy Information Administration (EIA) expects that shifts in petroleum product pricing may begin as early as mid- to late 2019.
“The effects on petroleum prices will be most acute in 2020, and the effects on prices will be moderate after that,” EIA stated in a market impact report published in March 2019.
I share this with you not to spread fear, but to keep you informed of how these changes may impact our fuel market. It’s likely the market will do its job and prices will move accordingly to help balance out supply. Prices certainly could go higher, but if they do, let’s hope it’s a gradual climb that gives the market time to adjust.
I should point out that there are skeptics who are wondering if the potential impacts of this issue are being overstated. If the global economy continues to slow or enters a recession, overall fuel demand would also drop. That would lessen the chances of disruptions to the distillate market caused by changes to marine fuel. We should have a better idea of where the economy is going later this year and what that could mean for demand.
It’s good to be aware of these coming changes and prepare for your fuel needs as you see fit. As the new regulation goes into effect, there are bound to be some issues. There are already questions about how compliant shippers will be and how enforcement will be handled. Some are likely to flat-out cheat. I believe we will see the new maritime fuel requirements go into effect on Jan. 1, 2020, and I don’t anticipate any extensions considering refiners and ship owners have known this day was coming for more than a decade. We shall soon see how it all plays out.