IMO 2020

IMO 2020 has not really triggered a lot of price action yet.

On Jan 1 2020 the current standard of 3.5% sulphur fuel (HSFO will be lowered to a max. of 0.5% (LSFO). Global consumption of fuel oil for large ships is currently 3M bbd, and although this is roughly only 3% of global consumption a change in these oil products could lead to significant price swings.

Three options to comply

  1. Installing a new motor or revising and existing one suitable to handle LSFO
  2. Installing a motor that runs on LNG
  3. Installing a scrubber

LNG is a clean alternative, this requires a large investment, so in the near term either a revision of an exiting motor or a scrubber is most cost effective. That said with a scrubber you run the risk of tighter fuel standards before your investment has paid for itself.

Oddly, although the measure was announced in 2016, the market remains reluctant to act, even though more ships are entering the docks for maintenance to have the technical adjustments made to their motors, transport rates and fuel prices have remained relatively stable.

Risks here

HSFO

As demand for HSFO decreases, there is a risk of overproduction at the same time there could be a shortage in some regions if refineries switch over to LSFO too fast.

LSFO

There is a risk of shortages if too little produced or too much is already purchased by large ship owners for security supply reasons.

So far price movements have not reflected the possible changes lying ahead

So questions are whether

  1. the market is underestimates this transition?
  2. Have many parties hedged themselves for the changes?

And/or

  1. Can we expect strong movements in the last months of the year?

So far we have seen some changes, for example more contracts for the trade in LSFO are becoming available and a few hedges have been seen and Refineries are preparing for the shift in demand.

The question here remains whether the lack of IMO2020 implementation is the calm before the storm or whether these stricter fuel regulations turn out to be a fizzle. This is definitely something to keep an eye on over next couple months here.

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