IMO’s 2020 fuel sulphur cap could push the price of crude oil above $90 a barrel as the shipping industry comes to rely on middle distillates, according to a newly issued Morgan Stanley research note.
When the emissions standard comes into force on 1 January 2020, vessels will need to ensure they are burning fuel with a sulphur content of 0.5 per cent or less. Alternatively, ship owners could continue to use heavy fuel oil and install a scrubber to strip sulphur from exhaust. But there are doubts as to how many of these devices could be installed before the deadline.
In April, Sigurd Jenssen, director of exhaust gas cleaning at Wärtsilä, told Reuters that it is realistic to think 2,000 to 3,000 vessels could be equipped with scrubbers before 2020. With the global fleet exceeding 60,000 vessels, a switch to middle distillates is inevitable.
The sulphur cap is expected to add 1.5 million barrels per day to crude demand by the end of the decade. However, it is not clear how this increase in demand will be reflected in bunker prices.
"Over the next few years, we expect tightness in one particular product — middle distillate — to lead to strength in one particular liquid, crude oil, and especially those crudes that look like Brent," says Martijn Rats, Morgan Stanley's global oil strategist, in the research note.
Brent crude oil is extracted from the North Sea and is renowned for its naturally low density and sulphur content. Demand for diesel and jet fuel, both middle distillates refined from crude oil, is also rising. Morgan Stanley predicts that global crude oil output would need to increase by 5.7 million barrels a day by 2020 to meet global, cross-industry demand.
The bank does not believe this is possible, and the supply glut will be reflected in rising prices.