- Fuel switching due to IMO 2020 will drive a large and sudden shift in demand for diesel in shipping.
- Fitch predicts the move to MGO is due to the cost, compatibility and regulatory issues associated with conversion to low sulphur fuel oil blends and the installation of scrubbers.
- Fitch’s report did not account for the price increases, but anticipates a “spike” in the general cost of diesel due to the maritime rules.
Diesel prices will could increase dramatically due to upcoming implementation of maritime sulfur emissions regulations under IMO 2020, reports Freightwaves.
Fitch report on IMO implications
The report cited a forecast from Fitch Solutions on the implications of the emissions rules from the International Maritime Organization.
While Fitch anticipates adequate diesel supply down the road, its report stated, “Fuel switching due to IMO 2020 will drive a large and sudden shift in demand for diesel in shipping, and a significant mismatch between supply and demand, and in turn price volatility appears inevitable during its early stages.”
Compulsory reduction in Sulfur reduction
The International Maritime Organization’s mandate to reduce the sulfur content of marine fuel to 0.5% sulfur from the current 3.5% sulfur cap will create demand strains on diesel fuel in the short term, causing price volatility.
There are two paths for diesel to migrate from the current demand pool into meeting demand from the marine sector –
- One way is to use an existing product called marine gasoil (MGO), which is a diesel product.
- The other is to consume a new type of product known as very low sulfur fuel oil (VLSFO).
What does VLSFO contain?
VLSFO will contain a significant amount of diesel molecules, produced using an intermediate product called vacuum gasoil (VGO). VGO is now used to make either finished diesel or gasoline.
There are other solutions, such as scrubbers (which allow ships to continue using high sulfur fuel oil) or liquified natural gas (LNG). But it is the MGO vs. VLSFO vs. existing diesel give-and-take that will be key going forward.
IMO 2020: The most significant environmental regulation
It is very different from other new regulations in one key respect – the solution to meeting the new rule will to some degree come from taking products from one stream of products coming from a refinery – the middle distillates – and using them to displace another stream, the fuel oil that is known sometimes as “the bottom of the barrel.”
That shift is forecast to be anywhere from 2 million to 2.5 million barrels/day (b/d), a significant amount on a base of about 35 million to 36 million b/d of distillate consumption, including diesel.
MGO for future
According to Fitch, it’s going to be MGO that will win out in the beginning. The move to MGO, Fitch said, is because of “cost, compatibility and regulatory issues associated with conversion to low sulphur fuel oil blends and the installation of scrubbers.”
Fitch’s report did not estimate the amount of any price increases, but anticipates a “spike” in the general cost of diesel due to the maritime rules.
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Source: FreightWaves
