Last year everyone was waiting for a big moment in the oil and fuel markets: #IMO2020, a seemingly small change around the type of fuel ships burned. In summary, the sulphur content of ship fuel, which is a residual fuel from refining operations, was being reduced by more than 80%. Crude oil is mostly categorized based on how “sour” it is, or how much sulphur it has, and how “heavy” it is, in other words how dense (non viscous) it is. Those two qualities, density and sulphur content, drive the entire refining supply chain. Refiners make gigantic investments over years based on these chemical properties of the oils they refine to make fuel.
The #IMO2020 change had the potential to make dramatic changes in how the refining complex (and thus the entire oil market) operated, and we had already started to see a few short term effects only days in to 2020:
- Oil tanker earnings went through the roof due to changing trade routes, a storage build of compliant fuels as well as excess HSFO, and increased US gulf exports
- There was a wild repricing in crude grades, with heavy and medium sweet crudes commanding at one point more than a 50% premium to Brent
- The “old” residual fuel price (produced from refining heavy/medium sour crudes) collapsed while the new residual fuel price was priced at an incredible premium
Then COVID-19 hit. Oil and fuel demand began plummeting overnight. An oil price war erupted between Saudi Arabia and Russia as market participants freaked out and struggled for market share to support their oil revenue dependent societies.
Total chaos in oil and fuel markets followed. Oil traded negative for the first time. Oil traders lost billions. Oil and fuel are looking anywhere and everywhere for any demand. Saudi Arabia put barrels on ships without knowing where they were going and Texan and Dutch refineries sent naphtha to Japan. An armada of tankers built up off the coast of California. Oil tanker earnings have exploded. Product tanker rates have risen to never seen levels of insanity previously seen only in the largest crude carriers (An MR tanker booked for nearly $100k!)
In the refining complex, we see some making money and others not. We see delays…