- IMO 2020-compliant marine fuel purchase for vessels without scrubbers will start in the next three months, VLSFO being the primary IMO 2020 compliant product.
- Future contracts should begin trading in volumes sufficient to provide market pricing direction insights and hedging opportunities.
- VLSFO and spot market transactions lack adequate trading volumes, traditional published futures market prices.
- Mid-2020 diesel-Brent price differentials for futures contracts continue to reflect widening versus mid-2019 of only about $2.00-3.00 per barrel (bbl).
- Futures contract price differentials for marker crudes have shown a bit more change than for refined products over the past six months.
- It is too late for a refiner to initiate a capital project aimed at capitalizing on market changes driven by IMO 2020.
- Refineries that have already invested in resid upgrade should see IMO 2020 as an opportunity rather than as a threat.
Shipping industry is preparing for tougher sulphur emission rule IMO 2020 implementation in just six months. Shipowners will likely start purchasing IMO 2020-compliant marine fuel for vessels without onboard scrubbers in the next three months.
An article published in Ship & Bunker provides an update on futures prices in Rotterdam, Singapore, and the U.S. for IMO 2020-related commodities. Assessment of refiners’ options to optimize individual refineries and refining networks are also provided.
Current Spot and Futures Prices
Marine Fuel 0.5%, also known as Very Low Sulfur Fuel Oil (VLSFO), is the primary IMO 2020 compliant distillate/residual product blend.
CME Group and Intercontinental Exchange have each launched futures contracts for Marine Fuel 0.5% in Singapore, Rotterdam, and the U.S. Gulf Coast.
As of now, all three VLSFO contracts on both exchanges have struggled to gain traction due to the lack of trading volume.
Over the coming months, these contracts should begin trading in volumes sufficient to provide market pricing direction insights and hedging opportunities.
Similarly, reporting services Argus, Platts, and OPIS are moving towards publishing daily spot prices for IMO 2020-compliant marine fuels based on actual transactions.
As with the VLSFO futures contracts, these spot market assessments will become meaningful market indicators as transaction volumes increase.
Visible indicator of market direction
With the new futures contracts for VLSFO and spot market transactions lacking adequate trading volumes, traditional published futures market prices are the most visible indicator of market direction in the interim.
Stillwater has put together a summary of IMO 2020-related futures prices from August 2019 through 2021. In addition to prices, the summary of IMO 2020-related futures prices also includes a number of key crude and refined product market price differentials.
Market behavior the key question
Futures contracts pricing relationships among key crude oils and refined products have been surprisingly stable over the past six months.
Whether current futures contract price differentials will accurately predict actual market behavior is a key question. Some market observers suggest that current futures contract price differentials may understate marketplace price changes that actually occur, driven by IMO 2020.
Figure 1 tracks current futures contracts price differentials for diesel products relative to Brent over the August 2019 through December 2021 timeframe.
Futures contract diesel price differentials to Brent in Northwest Europe, Singapore, and the U.S. have been relatively stable over the past six months. Mid-2020 diesel-Brent price differentials for futures contracts continue to reflect widening versus mid-2019 of only about $2.00-3.00 per barrel (bbl), as shown in Table 1 below.
Figure 2 tracks current futures contracts price differentials for Brent crude relative to HSFO over the August 2019 through December 2021 timeframe.
Futures contract HSFO price differentials to Brent in Northwest Europe and Singapore have also been relatively stable over the past six months. March 2020 Brent-HSFO price differentials for futures contracts continue to reflect widening versus August/September 2019 of $5.00-6.00/bbl, as shown in Table 2 below.
Figure 3 displays current futures contracts price differentials for diesel products relative to HSFO over the August 2019 through December 2021 timeframe.
Futures contract diesel products price differentials to HSFO in Northwest Europe and Singapore have been relatively stable over the past six months. June 2020 Brent-HSFO price differentials for futures contracts continue to reflect widening versus August/September 2019 of $6.307.40/bbl, as shown in Table 3 below.
Figure 4 displays current futures contracts price differentials for WTI Cushing and Dubai crudes versus Brent crude over the August 2019 through December 2021 timeframe.
Crudes show more change
Futures contract price differentials for marker crudes have shown a bit more change than for refined products over the past six months. December 2018 futures contract prices reflected the Brent-WTI Cushing price differential relatively stable in the $7.70-8.00/bbl range from August 2019 through June 2020.
Current futures prices reflect this differential decreasing by $1.13/bbl (from $7.77/bbl to $6.64/bbl) over the same timeframe, indicating a more positive market expectation on forward WTI pricing.
Meanwhile, December 2018 futures contract prices reflected the Brent – Dubai price differential widening by $0.53/bbl over the August 2019 through June 2020 timeframe. Current futures prices reflect this differential decreasing by $0.16/bbl over the same timeframe, a swing of almost $0.70/bbl over the past six months.
Given where future prices currently appear to be pointing crude oil and refined products prices, what can refiners do to optimize financial performance? What adjustments should be made to best navigate the changes that IMO 2020 will spark?
Refiner Processing Options
Refineries routinely re-optimize crude oil and other raw materials to be acquired, processing strategy within each refinery, and the mix of refined products that should be produced and moved to market.
Linear programming (LP) models and other tools are employed in this critical optimization process. Understanding what the marketplace options and refinery capabilities are and incorporating these options in the LP models are is critical to the optimization process.
With major refinery capital projects requiring notionally five years for engineering, permitting, and construction, it is too late for a refiner to initiate a capital project aimed at capitalizing on market changes driven by IMO 2020.
Refinery needs a major capital project
Unless a refinery also has a major capital project well underway, that refinery will be focused on optimizing its strategies for crude oil purchases, refinery processing, and refined products disposition with the assets currently in place or that can readily be modified with minor capital investment.
Refineries will have a strong incentive to work closely with their trading counterparts to build and maintain a clear picture of forward market prices and available supply and trading options.
Exposure to sweet crude
Less complex refineries will tend to be more exposed to sweet crude dependence and HS resid placement issues. All refineries will be driven to identify and evaluate processing options such as:
- Continually optimizing refinery crude slate as light/heavy crude price spreads widen
- Optimizing processing modes and fractionation cutpoints (e.g. max distillate vs max gasoline)
- Evaluating the economics of processing vacuum resid on FCC
- Resid cat cracking will look the most attractive for refineries with low sulfur crude slates
- Blending and sales of on-spec VLSFO over refinery dock
- Sales of VLSFO blend components over refinery dock
- Include consideration of non-traditional marine fuel blendstocks (e.g. low sulfur VGO, lower sulfur decanted oil)
- Sales of these “new” products may require minor piping and tankage CAPEX
- For a multi-refinery company, optimizing the refinery network rather than just individual refineries
- Initiate a dialogue with neighbor competitor refineries to surface new options and points of flexibility
- Evaluating other non-capital or minor capital changes that will maximize refinery gross Margins
IMO 2020 an opportunity than a threat
Refineries that have already invested in resid upgrading facilities should see IMO 2020 as an opportunity rather than as a threat. High sulfur crudes should become less expensive relative to marker crudes such as Brent and WTI.
Clean refined products should become more valuable. Refinery gross margins for more complex refineries should improve as a result of IMO 2020.
For the more complex refineries with resid upgrading, there are additional processing strategies that should be considered beyond those listed above:
- Optimize crude slate and other raw materials purchases
- Heavy-up the crude slate versus purchasing coker and resid hydrocracker feedstocks to utilize currently unfilled capacity
- Consider blending purchased resid with light sweet crudes to create pseudo crude blends
- Inter-refinery residual feedstock movements may become common, especially between countries
- Increase resid upgrading capacity without major capital investment
- Enable marine and rail car receipts of resid upgrading feedstocks
- Improve crude unit vacuum tower performance
- Debottleneck cokers (e.g. shorten coke drum cycle length)
- Debottleneck hydrocrackers and hydrotreaters (e.g. catalyst changeout; higher severity operations)
- Solvent extraction units gross margin uplift should increase
IMO 2020 rollout a bumpy ride?
IMO 2020 is likely to be the most impactful refined product specification change ever, largely because the change will be both global and instantaneous.
Marketplace valuation of Marine Fuel 0.5% (aka VLSFO) blends of IMO 2020-compliant fuel should gain significant liquidity over the next six months. The rollout of IMO 2020 is quite likely going to be a bumpy ride from a key price differentials perspective.
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