Changing oil landscape could be a boon for crude carriers and complex refiners
Disclosures and statements: I am long Teekay Tankers, Euronav, DHT, PBF Energy, and a basket of other crude shipping stocks. This article represents my opinions about the market and is not investment advice. If you notice any factual issues, please write me: firstname.lastname@example.org or message me on Twitter @calvinfroedge
Perhaps you’ve heard of the new #IMO2020 regulations which went into effect on January 1st. These regulations limit the sulphur content of “bunker fuel,” which is what, until December 31st 2019, most ships on the planet burned for propulsion. Most of this fuel was produced as a byproduct of refiners processing medium and heavy sulphurous crudes. Roughly 6.5m barrels per day of heavy residuals were produced, and the marine market used 3.5–4m barrels of it. The only way that ships can still use the old fuel as of January 1 is to either have a scrubber, a device that removes the sulphur, or to simply not comply. Non compliance will likely only be an issue among smaller ships in “backwater” locations, as the ramifications of a large operator such as Maersk not complying could be very costly. Singapore has stated 2 years of jail time for non compliance, and the US is offering whistle blowers 50% of multimillion dollar fines.
As of now, it is projected that around 12% of global tonnage has installed scrubbers, and by the end of the year, 20% of global tonnage. If we assume a non-compliance rate of 15% and an average scrubber penetration of 15% in 2020, then we can assume that 1–1.2m barrels per day will still be used by the marine industry. This means demand has dropped off the cliff for HSFO.
This presents a big problem for many refiners: A product which could previously be sold at a premium to crude has increasingly negative margins. Meanwhile, residuals produced from sweet crude (crude that has less than 0.5% sulphur content) are pricing near an all time high, at a staggering $35 premium to Brent. To illustrate just how nuts the change in dynamics are, consider that just yesterday a barrel of heavy, sweet Australian crude sold for a staggering $35 premium to Brent.