A strict new global environmental standard for shipping fuel is starting to make an impact in corners of the oil market, providing traders with opportunities to profit after months in the doldrums.
Effective January 1, the UN’s International Maritime Organization will require all ships to use fuel that contains no more than 0.5 per cent sulphur, or have so-called scrubbers installed in their exhaust stacks that strip the sulphur from emissions.
As a result, demand for the high-sulphur fuel oil — made from the dregs of a crude barrel and long fired in engine rooms — will fall by more than 2m barrels a day next year, the International Energy Agency has forecast.
The change is expected to boost demand instead for cleaner fuels, including marine gas oil, a distillate akin to diesel, and low-sulphur fuel oil. Traders say this is beginning to effect oil products prices.
The market premium for refined oil over crude reflects the notional profit to be gained by refiners of petroleum products. In the case of refining gas oil from Brent crude, it has increased by 19 per cent since September 1, to $18.58 a barrel on Tuesday, according to data from Intercontinental Exchange.
In north-west Europe, marine gas oil was selling for premium of $317 a tonne over high-sulphur fuel oil this month, according to Argus Media. The premium was $140 a tonne at the start of the year.
“The markets are starting to feel the effects of the IMO transition,” said Greg Sharenow, commodities portfolio manager at Pimco.
As the IMO rule was finalised, some analysts warned it could inflate global oil prices, since it incentivises refineries to search for the best grades of crude for making lower-sulphur marine fuels. The US government joined several flag states in seeking to phase in the rule’s implementation, without success.
Some traders have stored tankers full of low-sulphur fuel in a bet on higher prices — a strategy that has contributed to a shortfall of vessels, pushing up rates to hire a ship. Hugo De Stoop, chief executive of tanker fleet owner Euronav, said his company spent $200m to stockpile six months’ worth of fuel supplies.
The price strength of gas oil comes even as a slowing global economy and trade tensions weigh on demand for diesel and marine fuel. In the US, consumption of diesel and other distillates is running about 2 per cent below a year ago, according to the country’s Energy Information Administration.
Yet global stocks of distillate fuel have been declining more quickly than normal for this time of year in advance of the IMO requirements, said Jonathan Goldberg, chief investment officer at BBL Commodities in New York.
“The market is finally starting to price the appropriate signals to produce more clean, low-sulphur products and decrease production of higher-emitting fuels,” Mr Goldberg said.
In addition to marine gas oil, buyers have started signing deals for fuel oil containing 0.5 per cent sulphur, said Stephen Jones, Argus Media’s global head of oil products. Futures exchanges have also launched contracts based on low-sulphur marine fuel oil.
Robert Campbell, analyst at Energy Aspects, a consultancy, said that sales of very low-sulphur fuel oil could be high enough to avoid serious shortfalls of diesel or gas oil.
“This could be the period of peak uncertainty on these prices as we move into the transition,” he said. “Right now the market is trying to grasp how much of this stuff is there.”
Additional reporting by Harry Dempsey in London