IMO2020: Fuel Oil Price Crunch Could Come Sooner Than You Think, Says Analyst

Rashid: price realignment in 2019 (image credit/Energy Aspects)

Global fuel oil production will need to fall by 25% by 2020 for the market to be in balance but most likely the market will start to readjust before the 0.5% sulfur cap enters into force, an oil analyst has said.

Bunker fuel demand accounts for around half of global fuel oil demand and with no cushion from depleted stocks, which were down in 2017, fuel oil production will need to fall by a quarter to keep the market aligned.

"Over the next 18 months, fuel oil production will need to fall by around 25% to balance out the demand decline," said Rhidoy Rashid of London-based energy research consultancy Energy Aspects.

Although European high sulfur fuel oil cracks for 2019 remain at nearly $8 per barrel higher than for 2020, supply will need to be rationalised long before January 2020, Rashid said.

The only way to accomplish this is for prices to realign.

"It is increasingly apparent that the real challenge for the market will come, not in 2020, but in 2019, when pricing for fuel oil and crude will be heavily skewed by refiners' fears over the picture in 2020.

Rashid said that the wait-and-see approach of shipowners to the 0.5% cap is "economically rational" as in most cases, the cost of fuel can be passed on to charterers.

The burden, therefore, is passed on to the other side of the equation, the refiners.

Crudes with the highest sulphur and fuel oil content will have to be cheap enough to enter the most sophisticated refineries while unprepared refiners will need to battle for light sweet crude or will be at risk of closing down, according to Rashid.

Given the attractive returns likely to be available [over the short to medium term] from desulphurising heavy fuel oil, marine fuels demand will compete heavily with gasoline for space in vaccum gasoil hydrotreaters.