For most of 2019, I warned (admonitum) of the impending tidal wave of diesel price spikes that would begin with the activation of the International Maritime Organization (IMO) 2020 rule.
Months before the Jan. 1 activation of this global law on bunker fuel sulfur specification changes, it was the conventional opinion maintained by no other than the CEO of Exxon Mobil as well as the heads of the two largest independent refiners in the U.S. — Marathon and Valero — that this was going to increase diesel prices almost overnight.
We agreed with that conventional wisdom. To date, this has not happened. In fact, diesel prices have been plummeting. This will reverse itself, but in steps.
Marine-compliant IMO 2020 fuels, termed very low sulfur fuel oil (VLSFO), are mainly produced by using vacuum gas oil (VGO), which can either be blended into VLSFO or used to produce gasoline and conventional ultra low sulfur diesel (ULSD).
The weak Q3 and Q4 2019 global gasoline market and its associated lower crack spreads directed VGO away from the cat crackers that make gasoline and into the hydrotreaters, which are used to produce distillates including marine fuels.
This then created high inventories of marine bunker fuels throughout Q4 2019. So, at the start of IMO 2020 on Jan. 1, there was a surplus of IMO-compliant marine fuel rather than a demand responsive shortage, which lowered diesel prices as opposed to increasing them.
Demand for distillates also dropped and continues to do so due to a mild winter in the heating oil centers of Eastern Canada, the U.S. north-east, as well as in Europe and Japan.
Trade wars and/or tariffs, which appear to be announced then unannounced on a weekly basis, have slowed international maritime shipping demand.
The current global health alarm caused by the coronavirus or Covid-19 has, without doubt, negatively affected crude oil demand from China, the world’s second largest energy consumer. Travel, and hence jet fuel demand (another member of the distillate family of refined products) has also been negatively affected by this virus, and the threat that it may spread.
Combined, all of these factors have forced down prices for crude and its refined product derivatives.
But as I see it, the circle will be broken and the forecasted higher diesel prices will eventually become evident.
As more diesel related products are produced at the expense of gasoline production, this will lower gasoline inventories just as we enter the high demand spring/summer 2020 driving season.
Low gasoline inventories and low seasonal refinery runs will trigger higher, much more attractive refining margins for gasoline production. This will force up gasoline cracks and make gasoline a more financially attractive market than distillates.
So, VGO will switch over to gasoline production rather than to diesel. Higher gasoline production will lower the current glut in diesel levels, and prices will thereafter begin their inevitable, belated rise, beginning in Q2 2020 and in quarterly steps throughout the rest of the year.
It’s not a question of too little too late, but one of too much — much later.
~ The Grouch
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