As the 2020 sulphur cap is nearing, oil markets are preparing to adapt to the new situation. Currently, oil markets are dealing with strong demand for diesel and jet fuel in comparison to gasoline, along with the introduction of new bunker fuel regulations in 2020.
As John Kemp, a Reuters market analyst reports, increasing diesel and jet fuel prices are causing changes that could limit the chance of a severe shortage at the end of next year. In fact, the diesel premium has doubled since September, while it is also trading at the highest level since 2011 and before that 2008.
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What is more, refiners seem to be keen on maximising the production of diesel and jet fuel, while reducing the output of gasoline. In the meantime, refiners produced less than 45 barrels of gasoline per 100 barrels of crud.
This caused the ratio of distillate to gasoline production to be the highest level since the 2008, when oil prices were increasing prior to the global economic crisis.
Sulphur cap and fuel oils
IMO’s new regulations on bunker fuels could boost the transition to distillate fuel oil and away from heavy fuel oil. Namely, from 2020 ship owners will need to start using lower-sulphur fuel, or use scrubbers.
However, Mr. Kemp notes that some analysts are worried that the sulphur cap could cause a shortage of middle distillates, leading to an increase in diesel and jet fuel prices, as well as crude oil prices. Nevertheless, there is probably enough flexibility in the system to meet the rise in middle distillate demand over the next 12-15 months.
How the market responds
Currently, the majority of refiners are planning to increase their production of middle distillates for about a decade, responding to projections of rising diesel demand.
In fact, mega-refineries such as those in the Middle East and Asia, are considering to increase the production of middle distillates for the transport market, ahead of projections the 2020 rules will increase freight demand.
As far as consumption is concerned, John Kemp mentions that price changes will harmonize the adjustment to IMO rules, with higher diesel prices causing more fuel efficiency in the freight transportation sector.
Additionally, the rise in diesel prices could accelerate the shift away from diesel among European motorists, making more fuel available to the shipping industry.
Finally, by encouraging maximum refinery production and restricted consumption over the next six to nine months, the increase in diesel prices should assist in creating stocks and reduce the risk of a price spike in late 2019 and 2020.