Updated
Shippers beware: Oil
refineries are starting to eradicate stockpiles of sulfur-rich fuel that powers
the merchant fleet in anticipation of a demand collapse in fewer than 18
months.
Stockpiles have slumped
in the US and Singapore this year and traders directly involved in buying and
selling the fuel say some refineries already started to trim output in
anticipation of rules that will severely restrict consumption from Jan. 1,
2020.
The draw-down
underscores a tricky balancing act for an oil market facing a
once-in-a-generation shift in the kind of fuel it must supply. Refineries need
to cut back on output before demand collapses at the start of 2020, but if they
do so faster than consumption slides, then fuel-price volatility could
increase. The market is currently trading in what’s known as backwardation,
where immediate prices are higher than later ones – a structure that can punish
traders who store.
“It’s literally the
perfect storm,” Nevyn Nah, a Singapore-based analyst at Energy Aspects, said of
diminishing stockpiles. “Any fuel oil blender whose lease/storage lease is
going to expire now will not be renewing it because of the backwardation.” That
will limit the industry’s ability to produce suitable marine fuel, he said.
The oil market
traditionally gauges the strength of different fuels based on where they’re
trading relative to crude. Ship fuel, or bunker as it’s known, is normally at a
discount because it’s a residue after turning crude into more valuable products
like gasoline and diesel.
In Europe, that
discount, or crack, strengthened to $7.17 a barrel less than Brent crude, on
July 31 from minus $14.30 in April, according to fair-value data compiled by
Bloomberg. The price in January 2020 is at about a $24 discount.
The rule change,
announced in October 2016 by the International Maritime Organization (IMO),
will limit the sulfur content of bunker fuels to 0.5 percent starting Jan. 1,
2020, unless vessels have installed scrubbing equipment. The current limit in
most parts of the world is 3.5 percent. The pollutant is blamed for human
health conditions like asthma.
Traders in Singapore
say that a second reason for diminished stockpiles there is because some fuels
don’t meet the necessary specification.
In the US, they are at
28.7 million, the lowest for the time of year in at least three decades, Energy
Information Administration data show. Bunker-fuel inventories in Singapore, a
major global refueling hub for shipping, have dropped to a nine-year low of
14.8 million barrels, according to International Enterprise Singapore. (Bloomberg)
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