International regulations on the fuels used in shipping could tighten the oil market and push prices up to $90 per barrel in the next two years.
The International Maritime Organization (IMO) has new rules coming into effect at the start of 2020 requiring shipowners to dramatically lower the concentration of sulfur used in their fuels.
Ships plying the world’s oceans tend to use heavy fuel oil, a bottom-of-the-barrel fuel that is especially dirty. The IMO regulations are targeting this fuel because of its high sulfur content. Current rules allow sulfur concentrations of 3.5 percent, but by 2020 ships must slash that to just 0.5 percent. “Effectively, bunker fuel is the last refuge for sulphur, which has been driven out of most other oil products,” the IEA wrote earlier this year in its Oil 2018 report.
Shipowners have several options to achieve this goal, and there probably won’t be a single approach. They could install scrubbers to remove sulfur from the fuel, switch to low-sulfur fuels, or switch to LNG. Scrubbers are thought to be costly, although some shipowners see the payback period as worth it. LNG is also an expensive route.
But a lot of shipowners will switch over to lower-sulfur fuels such as gasoil, a distillate similar to diesel. The IEA says that by 2020, demand for gasoil will shoot up to 1.74 million barrels per day (mb/d), an increase of over 1 mb/d relative to 2018. That will displace the heavy fuel oil that is currently widespread. The IEA says that high-sulfur fuel oil demand will crater from 3.2 mb/d in 2019 to just 1.3 mb/d in 2020.