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Platts Snapshot


IMO 2020: A storm in a teacup?

With Jason Silber, Global Head of Ocean Intelligence, S&P Global Platts

September 20, 2017 08:30:14 EST (3:53)

A sense of anxiety is gripping the shipping industry as it looks toward the imposition of more stringent sulfur restrictions on marine fuel on January 1, 2020.


Many shipowners have yet to make up their minds on what fuel to use: will they pay more for diesel fuel? Burn hi-sulfur fuel and invest in expensive scrubbers? How about LNG? Ultimately it will be a mix of approaches, but with most players likely to choose diesel in the short run. As a result, many foresee a spike in diesel prices as the IMO's 2020 deadline nears.


Jason Silber, Global Head of Ocean Intelligence, S&P Global Platts, explores the role of human nature in the run up to 2020.


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Video Transcript


Welcome to The Snapshot – our series which examines the forces shaping and driving global commodities markets today.


Price spikes induced by panics are caused by two kinds of nature: Mother Nature and human nature.


Take Harvey and Irma, the two hurricanes that recently pounded Texas, Florida and the Caribbean. Or the blizzards that occasionally paralyze us here in New York City during the winter.


This is what always happens: as the storm nears, panic ensues as people rush supermarkets, emptying shelves of anything not nailed down. Filling stations run out of fuel. Prices spike on some key commodities.


Or take an ordinary thunderstorm in any city. As pedestrians run for cover, who’s the man standing on the corner with the fat grin on his face? Why it’s the umbrella salesman who has us exactly where he wants us.


In these cases, Mother Nature and human nature cooperated to wreak havoc and sow panic.


Tier 3 sulfur standards on gasoline in the US were introduced on January 1 2017. Many observers worried over a supply shortage of compliant fuel. But the shortfall never materialized. Turns out the market was prepared: no mother nature, no unknowns and no panic.


A similar sense of anxiety is gripping the shipping industry as it looks toward the imposition of more stringent sulfur restrictions on marine fuel on January 1, 2020.


Why the anxiety? Many shipowners haven’t made up their minds on what fuel to use: will they pay more for diesel fuel? Burn hi-sulfur fuel and invest in expensive scrubbers? How about LNG?


Ultimately it’ll be some mix of approaches, but most players are likely to choose diesel in the short run – it’s just the easiest option. As a result, however, many foresee a spike in diesel prices as the 2020 deadline nears.


Why? Some think refineries won’t be able to produce enough diesel to satisfy demand. But that simply isn’t true: Refinery production is split mainly between gasoline and diesel products. Refineries can shift their output roughly 8% in either direction as market demand dictates. And refineries worldwide are already shifting the mix toward diesel.


As 2020 approaches, marine diesel prices at major ports like Rotterdam, Singapore or Houston are likely to remain stable – refineries are nearby. It’s the second or third tier ports that might be vulnerable to potential spikes.


But while that fear appears more justified, it’s still overstated: justified because the large commodity houses could potentially leverage the panic just ahead of the 2020 deadline by jacking up prices and exploiting price differentials between ports. But once 2020 arrives, refiners and traders will move to fulfill demand. Furthermore, veteran ship operators are savvy and unlikely to be caught flatfooted.


Panic or not, the price of diesel fuel will certainly rise. Won’t shipowners suffer? Expect them to share as much of the pain as possible with their customers.


The 2020 deadline is really no surprise – it’s been on the horizon for years. The market is more psychologically prepared than many realize, and planning for the new fuel regime is definitely taking place. Mother Nature isn’t involved, and as was the case when previous sulfur restriction regimes were introduced, human nature may turn out to be a nonfactor.


2020 may in-fact end up as just another proverbial storm in a teacup.


Until next time on the Snapshot—we’ll be keeping an eye on the markets.





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