Platts Warns of Diesel Price Gains Amid IMO 2020

We all heard the hype about IMO 2020, and the projected price increases. When January 1 hit, markets watched the market – only to see a minimal impact. While marine fuel prices are definitely up, the effect has not rippled through the market. At least, not yet.

In a recent article, S&P Platts warns that diesel prices could still see volatility as a result of IMO 2020. Leading up to Jan 1, suppliers stashed away the new low-sulfur product to ensure plentiful inventories. That foresight kept the initial impacts low, but inventories are reportedly shrinking quickly.

The new low-sulfur product, called Very-Low Sulfur Fuel Oil (VLSFO), is a 0.5% bunker fuel. Currently, it’s trading cheaper than 0.1% marine gasoil (MGO), which is used in coastal areas which have had strict sulfur standards for years. But as VLSFO stocks decline, spreads between the products will shrink, leading marine vessels to use more MGO. MGO requires more low-sulfur crude utilization and heavier blending of middle distillates (diesel-like materials) to keep sulfur levels low. While MGO demand has been quiet so far, increased demand could begin putting pressure on diesel prices as many analysts warned about a year ago.

In conjunction with steadily rising middle distillate demand, some refiners have been slowing their runs due to poor economics, and others are maintaining a focus on gasoline rather than switching to more diesel production. With diesel inventories already very low for the winter season, this could spell trouble.

This combination of influences could have an adverse impact on diesel prices and fleets in the first half of 2020. As Platts summarizes: “Together, these factors will tighten global diesel/gasoiline balances, draw stocks and drive diesel/gasoil cracks substantially higher in H1 2020.” On the positive end, Platts forecasts that conditions will ease later in the year as more scrubbers are installed, and refineries add new capacity.

 

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The information contained herein is derived from sources believed to be reliable; however, this information is not guaranteed as to its accuracy or completeness. Furthermore, no responsibility is assumed for use of this material and no express or implied warranties or guarantees are made. This material and any view or comment expressed herein are provided for informational purposes only and should not be construed in any way as an inducement or recommendation to buy or sell products, commodity futures or options contracts.

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