Diesel and gasoil took up about 11.8% of the approximately 245.1 million mt of bunkers consumed by shipping in 2024. File Image / Pixabay

As the second week of the worsening Middle East conflict draws to a close, leaders around the world are scrambling to find measures to help ease pressures on their energy markets from disruption in the Strait of Hormuz.

The US government is seeking to provide insurance for ships transiting the waterway, as well as considering providing naval escorts in the region and lifting sanctions on other countries' oil exports. Meanwhile the Chinese government has banned exports of refined products in a bid to shore up its own domestic supply, and a range of countries are considering a release of petroleum reserves to help cut prices.

News also emerged on Thursday that Australia's government will relax sulfur limits for gasoline for a 60-day period, in a move that it estimates will add 100 million litres/month of domestic supply from product that would otherwise be exported.

With all of these measures and plans being developed, could some jurisdictions be tempted to seek ways to lift sulfur limits for marine fuels ?

Middle Distillate Shortage

Middle distillates have been the segment of the oil market most sharply hit by the supply shock so far.

The refineries producing the most of these products are either in the Middle East, or in Asia but reliant on Middle Eastern crude exports. The shutdown of the Ras Tanura refinery - Saudi Arabia's largest plant - following a drone attack last week has added significantly to the problem.

While ICE Brent crude futures have gained 32.9% since the Friday before the Iran strikes, ICE low-sulfur gasoil futures have jumped by 52.1% over the same period. Singapore VLSFO prices have advanced by 101.2% since February 27, according to Ship & Bunker prices, while LSMGO has surged by 136.7%.

Diesel and gasoil took up about 11.8% by volume of the approximately 245.1 million mt of bunkers consumed worldwide by the shipping industry in 2024, according to the latest official data from the IMO.

If just a third of this demand could be shifted back into consuming HSFO, 9.6 million mt/year of distillates could be freed up for use in other industries with no other options. Further savings could be made from a shift from VLSFO into HSFO - with VLSFO blending tending to require some distillates - and ships with scrubbers being allowed to shut them off to save on energy consumption would also reduce their bunker demand slightly, although this demand would be for HSFO.

If middle distillate shortages worsen in the event of a prolonged contact, could this factor - as well as the possibility of cutting costs for shipping by allowing them to consume cheaper HSFO temporarily - tempt some regulators?

How Could It Be Done?

The first problem to note with this idea is that it almost certainly wouldn't happen at the global level.

Any agreement by the IMO to amend its sulfur rules under MARPOL Annex VI, either the global 0.50% limit or the 0.1% limit in the emission control areas, would take months at the very least to implement, in the unlikely event that consensus could be found among the organisation's member states on this issue. The IMO also has the much larger problem of its net-zero framework to consider this year, which will be taking up all of its attention.

An IMO spokesperson told Ship & Bunker it would be for flag states to consider this problem.

"Flag states have jurisdiction over the ship," the spokesperson said.

"Any reports of discharge or incident should be made.

"MARPOL provides for exceptions 'for the purpose of securing the safety of a ship or saving life at sea' in most annexes."

At the flag or port state level, it's possible that the rules could be fudged, although this would go against the letter of the law for MARPOL Annex VI signatories. The relevant authorities in each country would need to be instructed to suspend inspections of marine fuel sulfur content, or to accept Fuel Oil Non-Availability Reports (FONARs) in circumstances where compliant fuels were deemed unreasonably expensive to some pre-agreed extent.

The regulations do not currently allow for sulfur limits to be suspended in this kind of way for purely economic reasons, so any country attempting this would be highly likely to receive a degree of condemnation and other backlash from the IMO and other countries.

The US would be the country most politically sympathetic towards this idea under its current administration, with a president that has expressed skepticism on environmental issues, is inclined to use the kind of executive power that would be required, and who presumably would not be troubled by disobliging the IMO.

At the opposite end of the spectrum, EU member states would be almost certain universally to reject such a move as threatening global environmental consensus and putting respiratory health in coastal communities at risk.

Asian countries might fall somewhere between the two, sympathetic towards the European position but also facing more severe fuel shortages than countries elsewhere in the world.

Why It's Unlikely to Happen

Bunker-industry sources speaking to Ship & Bunker about the idea this week were generally skeptical.

"The prevailing view is that the current conflict and high prices will not persist for long, and the deep-sea fleet will likely only need to bunker once during this period," Robin Meech, managing director of Marine and Energy Consulting Limited, told Ship & Bunker.

"Given the relative lack of inspections in many smaller ports, there is unlikely to be significant pressure for a temporary suspension of the regulations.

"Furthermore, in many circumstances, it may be more cost-effective for operators to use HSFO and pay the resulting fine rather than purchasing MGO 0.1%.

"I don't think the idea will have too many legs unless the US sees it as another way to humiliate IMO."

A trading source suggested the idea could end up causing significant problems.

"It would open a floodgate where consumers will rush to buy a certain grade and leave the market's cargoes lopsided," the source said.

"I also don't think the EU will allow this to disrupt their efforts and timeline to zero emissions.

"If they do, then the question is, do they allow all to do it or only some?

"The eastern hemisphere will be most unlikely to take point from the US."

Arne Anders Rasmussen, chief analyst at hedging firm GRM, suggested that the main problem would be shifting demand into HSFO, which is also likely to face shortages before long.

"Any circumvention of the rules would help the market, but it would mainly move demand from 0.5% to 3.5%, so I am not sure the impact would be that significant.

"I find it highly unlikely that the IMO can just decide to change rules. They are global, and it would be like opening Pandora's box."