For most regulatory changes, the optimal solutions are becoming clearer as the deadline is nearing, Poten & Partners said in its weekly opinion piece.
However, IMO 2020 does not yet appear to be conforming to that rule. Nine months before the oil and shipping industry will implement one of the most dramatic changes in product specification the world has ever seen, many uncertainties around fuel availability, product specifications and compliance remain.
According to the IEA, IMO’s sulfur rules impact around 4.5 mill barrels per day of bunker fuel, equivalent to 4.5% of global oil demand. The regulation allows for multiple compliance options, which has made it very difficult to forecast how the industry will handle the change and what the impact on product flows will be, Poten said.
It created a situation that limited the first-mover advantage towards compliance. It has kept market participants on the fence for a long time, increasing market uncertainty. The US Energy Information Administration (EIA) highlighted this uncertainty in a recent report.
“Many policy and technical complications, as well as potential market participant responses, are creating numerous interrelated factors that will have a significant influence on the eventual outcome. These factors are highly interdependent on one another, making cause and effect difficult to disentangle” it said.
What we do know is that the 60,000-vessel strong world shipping fleet will need bunker fuel and the various market participants are starting to position themselves to take advantage of real or perceived opportunities and market inefficiencies.
A significant number of shipowners have decided to install exhaust gas cleaning systems (scrubbers), while others will switch to compliant fuels, such as marine gasoil (MGO) or new products that have less than 0.5% sulfur, like very low sulfur fuel oil (VLSFO) or LNG.
Ultimately, who will use what fuel will be driven by price, performance and availability, and as the EIA already said, these factors are interrelated.
The world’s largest bunker ports (Singapore and Rotterdam) will probably have every possible variety of compliant fuel available, including VLSFO and LNG, on 1st January next year.
However, as the ports are getting smaller and the volumes of bunkers sold reduces, choices will have to be made. Heavy fuel oil is currently the dominant bunker fuel and is available worldwide. This will change in 2020. If most of the world fleet switches to compliant low sulfur fuels, bunker suppliers in some of the smaller ports –with only limited tankage available –may opt to limit their fuel choices to MGO and VLSFO. Alternatively, they could keep some HSFO in floating storage, until they figured out how future bunker demand in their area will be split between the different fuel types.
In the second half of 2020 and into 2021, it should become clearer how the bunker market will play out. A complicating factor is the uncertainty about the specifications and the availability of VLSFO. While an increasing number of large oil companies have announced that they will produce this new fuel and that it will be cheaper than MGO, issues of compatibility and stability need to be sorted out before shipowners will adopt this new fuel in large volumes.
In the early days and months of the changes, as the distribution channels for the new fuels are still being set up, we expect significant logistical challenges and dislocations in the market.
Some areas will be long on compliant fuels, while others will be short. Many ports will need to import compliant fuels and there will be some stockpiling in advance of the deadline.
Several trading companies and even some shipowners have indicated that they will use tankers to store compliant fuels ahead of the IMO deadline. Some will do so to take advantage of an expected price hike, while others want to ensure that they have enough supply.
We expect that the combination of these factors will lead to significant additional demand for product tankers, both for trading and floating storage, Poten concluded.