Part 3: International Maritime Organization (IMO) - About to Cause an Oil Spike?

A lot of news was made when Philip Verleger, an economist, issued a report regarding how the new regulations from the International Maritime Organization (IMO) would cause a spike in oil prices starting in 2020. The regulation states that starting in January 2020, ships must use lower sulfur fuels (dropping from 3.5% to 0.5%). Via Reuters, Goldman Sachs has a different take on the impact:

Goldman forecasts scrubber installations at 3,125 in 2020 and 4,450 in 2022. It expects scrubbed high-sulfur fuel oil (HSFO) consumption at a total of 1 million barrels per day (mbpd) by 2020 and 1.4 mpbd by 2025.

Installing scrubbers is one way that ships can meet the lower sulfur content rules.



Based my prior blog, Goldman Sachs was previously targeting 5,000 scrubber installments by 2025 so they are speeding up the switch-over to scrubbers.

The article also states that the shipping industry uses about 3.3 million barrels per day (mb/d) of high-sulfur marine fuels. Based on the quote, Goldman Sachs believes that  due to scrubber installments, 1 mb/d will be still in use come 2020. Goldman Sachs than states they believe the market can reach equilibrium based on:

“At an 80 percent compliance rate, we model that the market can reach equilibrium at a distillate-HSFO spread near current forwards, although at higher distillate cracks,” Goldman Sachs said. “We highlight, however, that this regulation’s costs may end up varying sharply with global growth and oil prices.”

I will admit I'm not totally sure what exactly that all means: ". . . distillate-HSFO spread near current forwards, although at higher distillate cracks . . .," but I do see the word equilibrium. Also, I do notice that in their last sentence they give themselves an out regarding global growth impact on oil demand. What I also notice is that they're looking at 80% compliance. If we look at 3.3 mb/d as the starting point, come 2020, 1 mb/d will still use HSFO due to installation of scrubbers. Close to 0.7 mb/d will still use HSFO due to non-compliance. That seems to mean that 1.7 mb/d of non-HSFO demand will be needed. That doesn't really seem to be any different than what Verleger was estimating. I might not understand all the dynamics, but it does seem that additional oil supply will need to result as oil that is used for HSFO will now be useless. I'll have to keep an eye out for if Verleger revises his conclusions at all.