A weekly look at what occurred in the oil markets of the U.S. and the world this past week and what’s ahead.
If you’re concerned you’ve missed some early market movements getting ready for IMO 2020, don’t worry; not a lot has happened yet.
That doesn’t mean to say that the market has been completely bereft of any activity that could be seen as movements aligned with the shift to lower-sulfur marine fuels on Jan. 1. The general consensus in the market is that ships would start cleaning out their tanks of the old fuel this month and that would be when the market would start reflecting new demand for marine fuels with sulfur content of 0.5% maximum sulfur, or 50 parts per million, down from a maximum of 350 parts per million.
That doesn’t mean that nothing has happened. For example, a small group of crude oils that are both sweet (low sulfur) and heavy (which means that in a refinery they generally produce a high yield of fuel oil that can be used in ships) has seen their values rise relative to benchmark crudes like Brent. (It’s an unusual combination in the world of crude). Separately, an S&P Global Platts reported this week that in the Northwest European mark, a spread between 3.5% sulfur fuel oil and a 1% sulfur fuel oil widened to its highest level since the price reporting agency’s history on both those grades began in 2000. The 1% fuel oil would be noncompliant with IMO 2020, but it is seen as a proxy for it since the market for it is relatively active and liquid.
But the type of numbers that are going to most concern truckers — prices that indicate growing diesel market tightness and rising prices — are not yet showing much movement.
To recap, diesel prices are vulnerable for an IMO 2020-driven spike for two key reasons. First, many shipowners are expected to turn to an existing product called marine gasoil, which is a diesel-like fuel that already exists and is widely used. Demand for more marine gasoil can divert diesel from the market for over-the-road applications to the marine market. Second, there is an intermediate product called vacuum gasoil (VGO) that can be used to produce either finished diesel or finished gasoline. But VGO also is expected to be diverted into producing a new product called very-low-sulfur fuel oil that is compliant with IMO 2020.
There’s no one number that the market will be able to point to and know that a price spike is coming. There are numerous crude-to-product and product-to-product comparisons that can be observed. But just spot selecting a few here and there is not showing diesel market tightness yet.
For example, based on numbers provided by S&P Global Platts, physical diesel markets in the U.S. are not showing any particular sign of strength. A comparison between physical ultra-low-sulfur diesel in the U.S. Gulf Coast delivered into the Colonial Pipeline — the giant line that runs between the Houston area and New York and points in between — shows that a year ago, a barrel of ULSD was a bit less than $16 more than a barrel of dated Brent, the key physical crude benchmark for the world. It got over $19/b a few times in the past year and even sunk below $10 as well. More recently it has been running above $16/b, but less than $17. In other words, it’s pretty much gone nowhere.
The comparison between dated Brent and the new 0.5% marine fuel — the very-low-sulfur fuel oil that is supposed to replace a good portion of the high-sulfur fuel oil — has been all over the map. Note that this product is a new offering by oil companies and is being impacted by companies merely testing its performance in ship engines rather than becoming, for now, a steady customer. The Platts history only begins at the start of this year, so it might not be the best proxy for IMO 2020 preparation. But in the U.S. Gulf Coast, its spread with dated Brent has been as high as $12/b, as low as negative $7/b and has been just a few dollars recently. Again, no signs of strength.
A comparison between dated Brent and existing marine gasoil is probably more indicative because the price history is more established and the product is more known. Again in Rotterdam, it was almost $12/b a year ago. And recently, it’s been between $12 and $13/b.
This does not mean that there is not going to be impact from IMO 2020. When markets spike because of changes in specifications, they often do so very rapidly. The road to higher prices is not always — in fact, it rarely is — a smooth steady ramp-up. There are times that markets suddenly react as if they’ve just discovered the new regulation.
IMO 2020 may do that eventually. But for now, its key markers are just sort of hanging around, waiting for the excitement to begin.
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All forecasts for next year see an imbalance between OPEC supply and demand, an imbalance that is beneficial to consumers like truck drivers. That’s why the reports that have emerged in the past week about OPEC production in August were a factor in some of the downward price pressure markets felt this week whenever trade war optimism alone couldn’t pull oil prices higher along with equities.
The International Energy Agency last month forecast that OPEC in 2020 will need average production of 29.1 million barrels/day to fill in the gap between global demand (rising relatively slowly) and non-OPEC production (rising as much as 2 million b/d next year — a big jump). After reducing output steadily since late late last year, OPEC reversed course in August and raised its output. The S&P Global Platts estimate was 29.93 million b/d; Reuters said 29.99 million b/d; Bloomberg said 29.61 million b/d. Those numbers are all up from July. And all of them are more than the IEA “call,” defined as that difference between non-OPEC supply and global demand. (OPEC’s own forecast for the call, which it refers to as the “difference,” is 29.41 million b/d).
It’s those numerical comparisons that will make it challenging for the development of any upward oil price move propelled by something other than IMO 2020 or an unexpected supply shock. That’s good news for diesel consumers.