How important is #IMO2020 to the tanker trade today?

Calvin Froedge
4 min readMay 7, 2020

At one point it was very important. And I think it will be again.

DHT Leopard — VLCC tanker

IMO2020, for those who don’t know, was a limit in the sulphur content of marine fuel. The regulations reduced allowable sulphur content by ~85%. That might not seem like a big deal but it has a big impact on refinery economics. Ships burn residual fuel, meaning what’s left at the bottom of the barrel after the refinery has made gasoline, diesel, jet fuel, etc. For a refinery to make optimal profits they need to be able to sell the stuff left over. The problem is that the type of crude you run determines what your residuals look like. If you run watery shale crude, you don’t have a very high residual yield, but it is low in sulphur. If you run a typical Saudi crude, you get a high residual yield, but it’s too high in sulphur to be burned in ships unless those ships have scrubbers installed — devices that “wash” the sulphur out of the fuel.

There are some crudes that are chemically similar to the medium and heavy crudes (like from Saudi Arabia) but that are naturally low in sulphur. Those crudes are pretty rare, less than 15% of global supply, and back in January were trading for more than a 50% premium over Brent. This was because the vast majority of ships were burning this new low sulphur fuel, and if you started with a heavy or medium sweet crude, you could produce more of it. It was closer to the process refineries were used to already — run a barrel of crude, sell what’s left over to ships.

However, because there’s not enough of this medium/heavy sweet crude, refineries have to blend the waste with other stuff like diesel. Over the long term if most ships are burning low sulphur fuel oil you create a lot more incremental demand for diesel. You’re taking diesel that would be burnt in a semi truck for instance, and you’re blending it with residuals so ships can burn it. You’re basically “watering down” the residuals to bring down the sulphur content. It’s a dislocation, and you actually need to make more middle distillates (diesel). It’s sort of a hidden demand feature. There’s a blending ratio based on the sulphur content of the crude you started with. The more sulphur, the more distillate you need to mix. Since marine fuel demand hasn’t really changed, you’ve now got extra residual fuel that you can’t do anything…

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Calvin Froedge

Software developer, investor, energy markets analyst.