As we near IMO 2020 implementation date, markets are growing nervous about the specifics of the deal. There’s still significant uncertainty regarding key details. For instance, as of the end of March, the exact fuel spec for compliant bunker fuel has not been created. Fuel specs require much more than just sulfur requirements. Refineries cannot begin planning reconfigurations until they know what product they’ll be producing. The longer it takes to create this spec, the less low-sulfur bunker fuel will be available, and the more diesel will be needed in the short-term.
Additionally, The IMO has hinted at other pollution regulations, which may ultimately lead to non-petroleum fuels being mandated. This creates uncertainty that slows investment – for instance, why invest in scrubbers if they’ll be obsolete in a few years? If refiners delay reconfigurations, or marine fleets delay scrubber installations, we may see even more volatility in the first few months of IMO 2020. This provides limited downside benefit to diesel consumers (as any new mandates would not be implemented for many years) but significant upside risk.
Finally, Marine fleets have not been forthcoming with their compliance strategy. Fleets can choose between installing scrubbers, using more expensive compliant fuels (ie, diesel), or switching to LNG. Because there are many options, companies do not have a first-mover advantage, and therefore they’ve been slow to publish their strategy. This lack of transparency means refiners cannot accurately predict demand – contributing further to price volatility.
With many questions left to be answered, the countdown to IMO 2020 is beginning to instill concern for many. While there’s little doubt the market will adapt over time, the key question is how long markets will take to smooth out – whether it will be just a few brief months, one year, or perhaps longer.