With the market for distillates such as diesel and jet back to their normal place in petroleum economics -- below the price of gasoline -- it was sobering to hear a speech last week in Malta, at Axelrod Energy Partners' World Fuel Oil Summit.
Carlos Cuervo, senior vice president for supply and trading at World Fuel Services, addressed the issue of what would happen to the bunker market in the coming years, as International Maritime Organization regulations on sulfur in bunker fuel begins to take hold.
There are some more limited changes that will go into effect next year, requiring tighter sulfur specifications in limited parts of the world, the so-called "SECAs," or Sulfur Emission Control Areas. Cuervo said bunker buyers in those SECAs will come into the market for low-sulfur fuel oil, and normal market forces will sort things out.
It's beginning in 2015 that he sees things getting a bit crazier. It won't be even lower-sulfur bunker fuel that will allow shipowners to meet the requirements, Cuervo said. Instead, it will be marine diesel. There just simply won't be enough low-sulfur bottoms, of 0.5% sulfur by 2020, to meet the needs of shipowners. Diesel will fill the gap.
It's that sort of view that still concerns many analysts, who don't view last year's diesel-driven events as an aberration. They see a variety of trends continuing, or getting ready to commence, that will put further pressure on the market for diesel and other distillates. Looming are the lower-sulfur regulations for northeast US heating oil that the state of New York seems determined to begin enforcing in the next few years. Removing sulfur from diesel can have a small impact on refinery yields. In a tight market, those changes matter. And then following that move, the market faces what Cuervo projects will be a significant move by ships to burn diesel instead of bunker fuel.
Cuervo's numbers estimate that a move to diesel by shipowners will put another 4 million b/d of diesel demand into the market. As he noted, given that an efficient refinery can produce about 40% diesel, it's as if we need another 10 million b/d of crude supply to make 4 million b/d of diesel.
That's an oversimplification, of course, but it does drive home the point about just what a significant change the market would be facing if the marine industry turns away from bunkers and toward the middle of the barrel.
With the prospect of high prices for marine diesel, wouldn't it make sense then for refiners to sink a lot of money into actually making bunker fuel with low sulfur? Maybe, but as Cuervo observed, refiners have tended to try to minimize the output of bottoms. They generally have viewed fuel oil the way Dracula views sunrise. "How are you going to put a lot of money into something you've been trying to get rid of?" he said.
This may bode well for gasoline prices. Would ship owners especially oil tankers consider switching to burning crude in their boilers?
They would have to burn crude (after 2020) of sulfur less than .5%, and there are only a handful of crudes like that. So no, it's not a solution to the issue. Sulfur is going to have to come out of the fuel one way or the other.