OPEC Warns on Substantial Spike in Low Sulfur Bunker Prices, Heavy Discounts for HSFO

Bunkers buyers could be faced with diesel-IFO differentials in the $600 per metric tonnes range.

The planned implementation of a 0.5 percent global sulfur cap for marine fuel has the potential to shock refining and oil markets, and there is an emerging risk that the premium for compliant low sulfur bunker fuel will witness a significant spike, while at the same time, high sulfur bunkers will be priced at severe discounts, according to the Organization of Petroleum Exporting Counties (OPEC).

In 2020 the International Maritime Organisation (IMO) is planning to introduce a 0.5 percent global sulfur cap for bunkers, although this could be pushed back to 2025 pending a review which is now expected later this year.

While in theory this could eliminate the viability of traditional HFO bunkers - the average global sulfur content of which is around 2.7 percent, according to Ship & Bunker estimates - provisions for equivalent methods of compliance will mean that, in practice, the continued use of otherwise non-compliant high-sulfur bunkers will be permitted when used in conjunction with scrubbing technology.

However OPEC notes that current scrubber uptake is low, and uncertainty over when the new regulations will come into force means there is little incentive for ship owners to invest in the technology before 2020.

"As of today, on-board scrubbers remain at the testing stage and there are doubts over whether, and when, they will prove successful and be adopted en masse," opinions OPEC in its latest World Oil Outlook.

"With scrubber penetration in 2020 now considered by many observers as likely to be low, the volume of high sulphur and mainly heavy marine fuel that would need to be converted to 0.5% sulphur marine distillate or other formulations could lie in the range of 2 mb/d to more than 3 mb/d.

"This requirement would be on top of the incremental volume and quality demands relating to diesel/gasoil, jet fuel/ kerosene and other fuels."

Refining Challenges

At the same time, the same uncertainties curbing the uptake of scrubbers is also causing refiners to hold off on making upgrades to meet the presumed eventual demand for 0.5 percent sulfur products.

If the implementation date remains at 2020, OPEC notes that refiners would have the opportunity to make some adaptations "but not to implement major investments that can go onstream by 2020.

"Also, it is unlikely that the shipping sector would be able to install scrubbers on thousands of in-service ships by 2020."

The extent to which demand can therefore be met thus hinges on the flexibility available within the refining system, says OPEC, and therefore come 2020 the refining sector could potentially be severely challenged.

"The need to supply large volumes of compliant fuel could lead to a period of substantial market tightness, and significantly raise price differentials for marine fuels relative to crude across all sectors and global regions," said OPEC.

"A situation such as the one that occurred in 2008, when diesel-IFO differentials spiked as high as $90/b ($600/tonne) could recur and remain until the market is able to respond, which could take some time."

In Singapore Monday, the IFO380 - MGO differential was $155.50 per metric tonne, according to Ship & Bunker data.

Ship & Bunker has in fact already observed that, relative to the price of crude, distillate products have been getting more expensive, and residual fuels less expensive.

Last November Ship & Bunker published an analysis detailing this development.