Oil Demand: IMO 2020 is a BIG DEAL
Posted: Thu Sep 13, 2018 9:28 am
IMO 2020 remains a major dislocation – our views from May by Morgan Stanley Research 9-12-2018
Starting 1 Jan 2020, new regulation from the International Maritime Organisation (IMO)
will sharply lower the maximum sulfur emission of global shipping. Whilst this industry
accounts for just ~4% of global oil demand, this nevertheless introduces one of the
largest dislocations in the oil products market in recent decades.
In two reports in May, we set out our expectations on how this would impact global oil
markets: The Coming Scramble for Middle Distillates and Countdown to IMO 2020: Not
Plain Sailing. In short, we expect that a significant part of the shipping industry will meet
the new regulations by switching to compliant fuels. Orders for scrubbers – another
way of complying – have accelerated in recent months but they remain insufficient,
especially in the short term. As a result, demand for marine gasoil – a middle distillate –
will increase sharply around early 2020, which will come at the expense of demand for
high-sulfur fuel oil. At least for a while, this will drive middle distillate cracks spreads
higher but put pressure on HSFO cracks spreads.
Refiners will likely shift their yields away from HSFO towards middle distillates as much
as possible. However, there are limitations to the speed and the extent to which this can
be done in the short term. Therefore, to satisfy middle distillate demand, we argued
that, at least for a while, the global refining system simply needs to process more crude
oil. This supported our view of a tighter oil markets and further oil price strength, which
we reiterate here.
In our May reports, we attached a set of crude and product price forecasts to this
outlook (see Exhibit 1 below). IMO 2020 does not have a phased introduction – it takes
effect abruptly, on a single day. These forecasts focused on the period shortly after 1
Jan 2020. Over time, shippers and refiners have a lot of scope to adapt – install more
scrubbers, build additional cokers, re-direct crude flow, etc. However, in the short term,
i.e. 2020, there is likely to be some stress within the system.
We argued that middle distillate prices would need to rise to levels where some demand
destruction takes place, which we estimated would happen at ~$850 per metric tonne.
Also, we saw HSFO prices fall to levels where it would start to displace other fuels in
power generation, such as coal and LNG. On this basis, we expected that HSFO could
fall to as little as $185/tonne.
These forecasts are summarized in Exhibit 1. Since then, a number of factors have
continued to evolve, leading us to adjust these forecasts. The basis for setting various
forecasts is unchanged, and the broad trends remain in place. We discuss these changes
in more detail below.
----------------------------------------
If you'd like to see the full report from MS, send me an email: dmsteffens@comcast.net
Starting 1 Jan 2020, new regulation from the International Maritime Organisation (IMO)
will sharply lower the maximum sulfur emission of global shipping. Whilst this industry
accounts for just ~4% of global oil demand, this nevertheless introduces one of the
largest dislocations in the oil products market in recent decades.
In two reports in May, we set out our expectations on how this would impact global oil
markets: The Coming Scramble for Middle Distillates and Countdown to IMO 2020: Not
Plain Sailing. In short, we expect that a significant part of the shipping industry will meet
the new regulations by switching to compliant fuels. Orders for scrubbers – another
way of complying – have accelerated in recent months but they remain insufficient,
especially in the short term. As a result, demand for marine gasoil – a middle distillate –
will increase sharply around early 2020, which will come at the expense of demand for
high-sulfur fuel oil. At least for a while, this will drive middle distillate cracks spreads
higher but put pressure on HSFO cracks spreads.
Refiners will likely shift their yields away from HSFO towards middle distillates as much
as possible. However, there are limitations to the speed and the extent to which this can
be done in the short term. Therefore, to satisfy middle distillate demand, we argued
that, at least for a while, the global refining system simply needs to process more crude
oil. This supported our view of a tighter oil markets and further oil price strength, which
we reiterate here.
In our May reports, we attached a set of crude and product price forecasts to this
outlook (see Exhibit 1 below). IMO 2020 does not have a phased introduction – it takes
effect abruptly, on a single day. These forecasts focused on the period shortly after 1
Jan 2020. Over time, shippers and refiners have a lot of scope to adapt – install more
scrubbers, build additional cokers, re-direct crude flow, etc. However, in the short term,
i.e. 2020, there is likely to be some stress within the system.
We argued that middle distillate prices would need to rise to levels where some demand
destruction takes place, which we estimated would happen at ~$850 per metric tonne.
Also, we saw HSFO prices fall to levels where it would start to displace other fuels in
power generation, such as coal and LNG. On this basis, we expected that HSFO could
fall to as little as $185/tonne.
These forecasts are summarized in Exhibit 1. Since then, a number of factors have
continued to evolve, leading us to adjust these forecasts. The basis for setting various
forecasts is unchanged, and the broad trends remain in place. We discuss these changes
in more detail below.
----------------------------------------
If you'd like to see the full report from MS, send me an email: dmsteffens@comcast.net