IMO 2020 will finally kick in on Jan. 1, 2020. Price signs of the market’s transition to comply with the new IMO rules are getting acceleratingly strong.
High sulfur fuel oil (HSFO) discounts start to widen as the new rules are moving towards implementation, while prices for low-sulphur fuel oil (LSFO) and IMO-compliant marine gasoil (MGO) have been on an upward trend over 2019.
According to the International Energy Agency, cracks for HSFO in Rotterdam against North Sea Dated reached a 10-year low of -$33.01/bbl on Nov. 13. The LSFO-HSFO spread in North West Europe blew out to almost $30/bbl in late October, having been $2.13/bbl on average in 2018.
In Singapore, HSFO cracks averaged -$12.36/bbl in October, a drop of $13.58/bbl from September. Meanwhile, 0.5% sulphur marine fuel cracks vs. Dubai averaged $15.22/bbl in October, having been $6.78/bbl on average in the first half of 2019.
A similar story is seen in the US Gulf Coast where IMO-compliant fuel is trading at around $30/bbl above 3.5% bunker fuel.
These impacts from the IMO 2020 are starting to flow through into the crude markets, leading to increasing discounts to sour crudes. In North America, these trends can be seen in gulf coast sour crudes like the Argus Sour Crude Index (ASCI) and in heavy sour crudes like WCS or Maya.
“These factors should combine to benefit refiners who can source these discounted products and crudes cheaply and upgrade them into higher valued products,” Simmons Energy, an independent investment bank specializing in the energy industry, noted in a recent research report.
HSFO to cokers
“One current opportunity in the market is running discounted HSFO or heavy intermediates through cokers instead of heavy sour crude. Discounts on HSFO in the gulf coast have reached as high as $40/bbl to Ultra-low-sulfur diesel (ULSD), and in Europe HSFO has reached a $30/bbl discount to Brent. Several refiners have reported doing some of this, with a few caveats.”
According to Simmons Energy, the big hurdle here for most operators will likely be logistics. “The logistical capability of sourcing heavy intermediates varies significantly from facility to facility – separate transportation and storage is needed. Another main consideration is that any swap of a crude barrel to a heavy intermediate barrel will not be 1 to 1 – there is some efficiency loss.”
These challenges aside, companies, especially coastal refiners with high coking capacity, are currently pursuing this opportunity where possible.
“We have seen with the further discount or the rapid discounts in HSFO and other heavy intermediates an opportunity to increase utilization in a number of our refineries. They’re relatively small volumes, 1,000 to 5,000 b/d here and there, dependent on the refinery across our portfolio. We do have substantial coking capacity to upgrade these streams and expect a benefit from these discounts,” Jeff Dietert, Vice President of Phillips 66, said in a 3Q earnings call.
Similarly, PBF Energy claims that it will ramp up runs of residuals to 50,000 b/d going forward and can even push this further if the right feedstock opportunities present themselves. Valero stated that it has been—and expects to increase—running HSFO blend components. MPC has the logistical capability at its coastal refineries to receive around 50,000 b/d of HSFO for processing in its cokers.
VGO to marine fuel diversion
It has been widely thought that low sulfur VGO, used primarily as a fluid catalytic cracker (FCC) feedstock, could be diverted from FCC units that produce gasoline, and instead be sent to the marine fuel market either as a blendstock or as a direct fuel.
Valero suggested that this should happen when LSVGO hits a $5/bbl premium to gasoline blendstock. Actually, that $5/bbl threshold has been reached a handful of times over the past several winters.
“If this diversion to the marine market does occur, it should provide some support to the gasoline market and some top end resistance to the marine fuel market (less gasoline produced, more marine fuel produced). Gasoline cracks have been significantly weaker than distillate cracks in the recent past, so this additional leg of support should be helpful on that side of the product spectrum,” Simmons Energy said.