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Cheaper compliant fuel oil stalks gasoil's lead in IMO 2020 switch

Cheaper compliant fuel oil stalks gasoil's lead in IMO 2020 switch
FILE PHOTO: Smoke billows from the towers of an oil refinery off the coast of Singapore March 14, 2008. REUTERS/Vivek Prakash/ Files -
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Vivek Prakash(Reuters)
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By Koustav Samanta

SINGAPORE (Reuters) – When new global rules limiting the amount of sulphur in shipping fuels were announced, marine gasoil (MGO), a type of diesel fuel used on ships, was declared the early winner since most types readily met the new 0.5% limit on sulphur content.

But with only about 100 days before the International Maritime Organization’s (IMO) rules start, analysts and traders agree that the scale of the MGO demand swing will not be as great as expected.

Instead, very-low sulphur fuel oil (VLSFO) has emerged as a dark horse to challenge MGO as a replacement for high-sulphur fuel oil, with a 3.5% sulphur limit, once the switch begins in 2020.

VLSFO for sale in October in Singapore, the world’s biggest ship fuelling port, is currently indicated at $465.25 a tonne, according to data from brokers Starfuels. That compares to MGO at $556 a tonne in the city-state, according to ClearLynx. <BKLSM-SGP-CLY>

For a graphic on Singapore marine fuel prices gyrate ahead of IMO 2020 rule change, click https://fingfx.thomsonreuters.com/gfx/ce/7/6291/6274/SingaporeIMOFuels.png

With the supply of VLSFO set to jump, shipowners are expected to lean toward the lower cost option. At stake is which type of fuel will replace the 3.6 million barrels per day (bpd) of HSFO, the shipping industry currently consumes.

“In Europe and Singapore we’ve been successfully producing batches of VLSFO and we’ve been working hard with our customers to test those and try them. The feedback has been positive,” Sharon Weintraub, the Chief Executive Officer for Supply and Trading, Eastern Hemisphere, at BP Plc told Reuters.

“We expect most people will look to migrate to VLSFO. However, there will be a proportion of more conservative customers who are looking to use MGO.”

The global shipping industry was initially sceptical about the quality of VLSFO, but as 2020 approaches market participants agree there is growing confidence in VLSFO.

“The concern about quality is not as great as it used to be. It’s being tested left, right and centre. Most of the fuels available are stable, fit for use, and in general of good quality,” Lars Malmbratt, General Manager for Bunker Procurement at Swedish shipping company Stena Bulk said on Tuesday on the sidelines of an industry conference in Singapore.

MGO’s established accessibility at ports bolstered expectations for its dominance while there were doubts about how well supplied low sulphur fuel oil variants could be.

“The closer we get to 2020, the more it seems there will be more low sulphur fuel oil than people previously thought,” said Matt Stanley, an oil broker at StarFuels in Dubai.

RISINGDEMANDTIDE

Consultancy Energy Aspects said last month that the global refining industry is likely to produce more than 1 million bpd of VLSFO from now until the second quarter of 2020.

“If all this LSFO can be placed with shipping companies, which is not yet guaranteed given the lack of experience ship owners have with this fuel, diesel will be the loser,” Energy Aspects analysts said in a note last week.

Even so, incremental gasoil demand growth because of the IMO 2020 switch will be between 1.4 million bpd, according to consultants FGE, and 2 million bpd, according to Energy Aspects, as some shippers prefer to stick with proven grades.

“There are still a small handful of ship owners who are not quite convinced about the quality of the VLSFO, and they would insist … to burn low sulphur gasoil, which is proven, has an ISO standard and is stable,” said Justin Tan, bunker procurement manager at The China Navigation Co, Singapore.

Still, he added, “the industry is pressured… to find the most cost efficient way of operating a vessel.”

The slowing economy is also working against MGO.

“The (gasoil) market is facing less of a squeeze than we had previously feared,” said Emma Richards, Senior Oil & Gas Analyst at Fitch Solutions.

“The bigger issue… is the slowdown in global trade growth we’re seeing, which will dampen demand for marine fuels as a whole, and the weakening of industrial demand for diesel, as global economic activity cools off.”

Even so, the extent of the IMO 2020 switch will generate a notable draw on global fuel supplies.

“The market has underestimated the difficulty of supplying the new 0.5% sulphur gasoil material given the scale involved,” said Sri Paravaikkarasu, a director at FGE.

(Additional reporting by Roslan Khasawneh and Florence Tan in SINGAPORE. Editing by Gavin Maguire and Christian Schmollinger)

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