As the global crude industry prepares for the shift toward the 0.5% global sulfur cap for fuel oil in 2020, sweet crudes including domestic USGC grades will most likely see an increase in price while heavier grades could be hit with large discounts.
This increase will be driven by rising global demand for distillate-rich grades to make lower sulfur fuel oil to meet the new specs set forth by the International Maritime Organization, according to Martin Tallett of EnSys, recently speaking at the February meeting of the Crude Oil Quality Association.
“The ability to increase desulfurization among global refineries is limited,” Tallett said. “As a result, many are switching to sweet crude to make new fuel oil.”
But there is already high global demand for light sweet crude, meaning an increase in premiums for crudes like Permian WTI MEH over medium sour grades could be on the horizon.
In addition, the cost of transporting crude oil and products by ship will most likely increase because of tight global refining capacity. This could translate into delivered costs for crude and products that are twice as high or even three times as high. “There are potentially significant impacts on prices because of this rule,” Tallett said.
At the same time, heavy sour and medium sour grades could see steep discounts as refiners veer away from these in favor of middle distillate-rich light sweet grades.
For Canadian crude producers in particular, the new IMO sulfur specs only add to price pressure from ongoing logistics constraints for heavy sour grades like WCS.
“This is a very positive situation to be in for refiners, especially for those that are more complex,” Tallett said.
Complex refineries in the USGC can take advantage of lower prices on heavier, more sour grades to earn higher returns on products.
A drop in price of sour grades versus domestic light sweets could lead regional refiners to optimize their slates to rely proportionately more on sour grades.
This would free up more light sweet grades for export to regions equipped with less sophisticated refining capacity.
The adoption rates for scrubbers moving forward could affect how quickly and to what degree the market changes.
So far, only 400 of 50,000 total global vessels adhering to the new specs have ordered scrubbers in preparation for the spec change. As a result, the volume of fuel scrubbed will be small.
Moving forward, if significantly more vessels employ scrubbers to meet the new fuel oil specifications, this could shift refining demand for low-sulfur fuel oil supply.