Middle distillates will initially emerge as the primary route to the 2020 0.5% sulfur cap compliance, Gibson said.
However, as significant as the impact will be from an operational perspective, attention should also be focused upon the trading opportunities that such a seismic shift will create.
The IEA has predicted that middle distillates demand (excluding bunkers) will grow by 1.9 mill barrels by 2020, whilst refining throughput will grow by 3.9 mill barrels per day. Whilst the IEA does not specifically state its assumptions for the increase in middle distillates demand directly linked to the specification change, a figure of 2 mill barrels per day has emerged as a consensus among many analysts, indicating a very tight and perhaps even short gasoil market at the time.
This is likely to generate inter-regional imbalances and pricing differentials, generating arbitrage opportunities for traders resulting in freight volatility in the product tanker market.
In the run up to 2020, new refining capacity in the Middle and Far East is due to come on stream. For example, 2019 is expected to see the start-up of Saudi Arabia’s 400,000 barrels per day Jizan refinery, which will be well placed to ship middle distillates to both East and West destinations.
Other major Middle Eastern projects are likely to miss the start of the 2020 party, meaning the existing infrastructure, capacity upgrades and capacity expansions in other regions (mainly Asia) will need to contribute to the global distillates pool. However, all regions will see a significant demand shift at the time, with only the Middle East, Russia and the US likely to have any surplus product for export, Gibson said.
For clean tankers, these developments are clearly supportive from a demand perspective through the generation of new trade flows. However, the implications for dirty product tankers are harder to gauge and much will depend on where demand for what will be a surplus of fuel oil emerges.
Much will depend on the eventual role scrubbers play and how much of the excess fuel oil can be consumed for other purposes, such as power generation, or as a low-cost feedstock to more complex refiners who have the facilities to handle it. Indeed, simple refineries with high fuel oil yields may be forced to rationalise capacity and fuel oil production will be less attractive.
This is likely to lead to reduced short haul trade within the developed OECD markets, with surplus volumes likely to be shipped into less developed nations. With increasing volumes likely to be shipped further afield, the decline volumes could be partially compensated for by longer voyages in terms of tonne/mile demand. Equally, crude trading will be impacted, with sweeter crudes commanding a higher premium over the sour grades.
Evidently from a clean tanker demand perspective, 2020 offers the potential for strong growth, whilst dirty product tankers face a more uncertain path. However, as we move into the next decade, the impact of new regulations is likely to push scrapping higher, particularly of older vessels, which tend to trade more in the dirty products markets.
Furthermore, just as we see a demand shift, we could also witness a higher proportion of the younger dirty fleet migrating into the clean tanker market, Gibson concluded.
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Source: Tanker Operator
