As recently as a year ago, the oil market was in a panic about changes to the kind of fuel that ships must burn.
A senior executive called the switch the biggest change to the oil industry ever. Traders were anticipating a bonanza. The shipping industry was warning about potential accidents. Volatility in air-fuel, trucking and other costs were being touted.
While some of those concerns linger, things have subsequently calmed down a little. This story looks at why and what’s likely to happen next.
Crude Shift
The regulations from the UN’s International Maritime Organization, which start in January, require ships to burn fuel containing less sulfur. That makes life difficult for refineries because residual oil -- the stuff that vessels mostly use today -- often has high concentrations of the substance.
Part of the panic has been addressed by a shift in the type of crude that’s being pumped out of the ground globally. Much of it is now less dense and contains less sulfur, lowering the pressure on refineries to find a way to remove the pollutant blamed for causing acid rain and aggravating human health conditions like asthma.
Shale oil production has surged in the U.S., while supply of medium and heavy crudes containing more sulfur has ebbed due to sanctions on Iran, the collapse of Venezuela, and OPEC’s persisting output cuts. The end result -- say analysts at Wood Mackenzie Ltd., Facts Global Energy, Energy Aspects Ltd. and JBC Energy GmbH -- has been curbed supplies of the heavier, sulfurous ship fuel that owners will be mostly barred from buying next year. That’s eased fears of a huge oversupply.
While that shift in crude output should result in less high-sulfur fuel oil, it raises a different question: will producing the new, cleaner fuels that ships need also become easier?
The short answer is yes, at least a little bit, according to Wood Mackenzie. Overall, the crude coming out the ground in 2020 has a slightly higher yield of the middle-distillate type fuels that will be used by ships, according to an analysis by the firm comparing the market with 2016. One concern, though, is that the abundance of lighter crudes also risks creating a glut of naphtha, a product used to make gasoline and petrochemicals.
Industries Prepare