IMO: More than enough quality MFO 0.5% if the price is right

Bjarne Schieldrop, chief commodities analyst at SEB, the Nordic corporate bank, has released a new report on the International Maritime Organisation’s (IMO) 2020 sulphur emissions regulations for global shipping. Key points include:

• The world’s refineries can produce more than enough quality MFO 0.5% (Marine Fuel Oil) in 2020 using Straight Run Fuel Oil 0.5%. All that is needed is a sufficiently high product price, i.e. around USD 90/ton less than Gasoil.
• Between 2020 and 2022, the first three years IMO regulations are in force, we expect MFO 0.5% to trade at a USD 90/ton discount to the Gasoil 0.1% price. Subsequently, we forecast the MFO 0.5% price premium to HFO 3.5% will fall towards USD 90/ton.
• We still expect a significant surplus of HFO 3.5% in 2020-22, as well as stock building and a sharply lower HFO 3.5% price. We forecast production of MFO 0.5% fuel oil will cause the Gasoil market to tighten, as middle distillates in the form of VGO are retained within MFO 0.5%. As a result, we still estimate the Gasoil to HFO 3.5% price spread will widen to more than USD 450/ton in 2020 and the MFO 0.5% to HFO 3.5% price spread to increase to over USD 360/ton, before slowly but steadily decreasing once again as the market adapts.
• EU28 can produce more than one million bl/day of MFO 0.5% by using the crude streams consumed in 2017. That is more than sufficient to cover domestic area demand as well as international bunkering taking place within EU28.
• The global shipping market is clearly moving down the scrubber path. Prisoners’ dilemma and first mover advantage considerations have caused scrubber installations to snowball. We expect this situation to continue unless it can be proved that scrubbers are damaging the marine environment.
• Beware of the current price of the forward 2020 Gasoil crack to Brent. It represents a warning. Such a high gasoil crack for a full year has not been seen since 2008 when the Gasoil market was tight and Brent crude rallied to $148/bl. If the market is right, we are probably set for considerable price volatility in 2020.
• Spots will call the shots. We expect the implications of IMO 2020 to start to impact physical oil product markets from H2 2019, resulting in a sharp widening of product spot price spreads. At that point, we forecast a sharp increase in the 2020 forward Gasoil 0.1% to HFO 3.5% price spread.