In International Shipping News 24/10/2016
Upcoming changes in marine fuel regulation should boost middle distillate consumption and this, combined with increasing gasoline demand from Asia-Pacific, could prove a boon for opportunistic refiners. But oil products inventory levels remain worryingly high and the industry outlook gloomy.
If the International Maritime Organisation (IMO) decides global marine fuel restrictions will have to shift from 3.5pc to 0.5pc in January 2020, as opposed to January 2025, the refining sector could benefit from a surge in middle distillate consumption, refiners said at the Oil and Money conference in London.
The IMO will decide next week whether or not to implement the global cap on the sulphur content of marine fuel on 1 January 2020 or to postpone until 2025.
“The change in marine diesel specifications will affect the market, if the IMO regulation comes into effect in 2020 as expected”, Bapco board director Dawood Nassif said.
Shipowners worry about marine fuel availability if the new global 0.5pc sulphur cap is implemented by 2020. “There is enough refining capacity, but if refiners don’t have the right configuration to make the right specification” it becomes an issue, Nassif said. “Refiners have to add hydrocrackers and hydrotreaters and many cannot afford the investment,” he said.
Varo Energy chief executive Roger Brown said market tightness in diesel arising from the IMO rules should correct itself once the fuel oil-diesel spread shoots up. “When the spread will go up we will start to see [shipowners] installing scrubbers. They will be able to afford to do so because of the price level of fuel oil compared to diesel,” he said. Shipowners can use scrubbers to remove sulphur from ships’ exhaust fumes as an alternative to switching to fuel with a lower sulphur content, but they are costly.
Refinery production has been geared globally — and especially upgrades in Europe — towards diesel, to meet demand. “But now there is a structural increase in gasoline demand, which is driven by changes in Europe but also by massive growth in gasoline markets in India and Asia,” Brown said.
Brown expects an increase in volatility in diesel-gasoline cracks as refiners seek to balance out gasoline and distillate demand. “I think everyone was surprised by how fast refineries could shift their yields to produce more gasoline to meet that demand last year. But if you start to add middle distillate demand as well, then you don’t have that possibility to shift yields,” he said.
Brown expects market conditions for refiners to remain favourable in the next 18 months, but “it is going to be a very bumpy road for refiners globally”. He said the industry has had relatively better times recently, because 4mn b/d was permanently removed from the market as refineries were closed.
All eyes are now on inventory levels. High crude inventories have encouraged crude producers to price oil into refineries, and refiners have ramped up production. “But we have filled up our own inventories. And the immediate question for refiners is what we are going to do when they are going to come back down,” Brown said.
Varo Energy expects crude markets to get tighter. “When that happens you will see run cuts and you will see a very painful time,” he said.
Small refiners could be first in line when it comes to making capacity cuts. Bapco’s Nassif said the ideal refinery size is around 400,000 b/d. But Varo’s Brown said small refiners are not necessarily the ones that are going to fail. The success of a refinery lies in technical and commercial understanding, in picking the right crude for a plant and a market, more so than size and location, he said.
Source: Argus
