651 views | Akanimo Sampson | January 2, 2020
The low sulphur regime of the International Maritime Organisation (IMO) is likely to have an impact on the Persian Gulf countries due to the high level of sulphur content in their crude. This could spark a major transformation in oil markets as the new regulations covering the sulphur content of marine fuels has taken effect from January 1.
Except Iraq, all the other Arab states of the Persian Gulf affected are : Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. IMO had since ruled that from January 1, 2020, marine sector emissions in international waters will be slashed.
The marine sector has to reduce sulphur emissions by over 80 per cent by switching to lower sulphur fuels. The rules define that the global 0.5 per cent sulphur cap enters into force this 2020, and more than 70,000 ships will be affected by the regulation.
The IMO 2020 rules have been estimated to affect as much as 3.5 million barrels per day of demand for high sulphur fuel oil, the shipping industry’s traditional fuel.
Industry insiders said that the UAE ratified the IMO 2020 rules in May and it will not rush to punish non-compliant ships as the new rules became operational from January 1. They said the UAE holds strategic position in the region because of Fujairah Port where thousands of ships go to refuel each year when calling at ports in the Middle East.
Federal Transport Authority Chairman, Abdullah Al Nuaimi, said recently that the UAE will adopt a flexible approach toward those ships that breach the environmental regulations from January 1.
According to one official, “the ships rejected by another port for non-compliance should not call in the UAE. The UAE is developing a new maritime trade law that will help standardise penalties across ports.”
Substantial industry attention has been focused on how refiners, traders, ports and the shipping industry will adjust. But, the sulphur content of refined fuels is largely a function of the content in the original crude oil. For a region that produces a relatively sour barrel, the Middle East could face changes in the demand profile for its crude exports post 2020.
As Mena grades are on average heavier and sour, their long-term demand will be a function of the appetite of highly complex refineries, mainly located in Asian markets. Crude exported from Mena is generally of medium to heavy gravity and sour, although there is a wide variation by country.
Commodity Analyst at Emirates NBD Research, Edward Bell, said “in the Gulf countries, however, most crudes are classified as sour and yield a relatively larger share of fuel oil, precisely the opposite of what markets will be looking for as baseload crudes to meet IMO rules.”
In a note, Emirates NBD Research said, “on a weighted average production basis, the UAE’s main grades come in at an API of 38 and sulphur content of 1.1 per cent. For export markets, the UAE’s crude quality is likely to become lighter as Murban (39.7, 0.8 per cent sulphur) takes up more of the share of exported barrels as grades such as Upper Zakum (33.9, 1.8 per cent sulphur) are fed into an upgraded and expanded refinery at Ruwais.”
Bell is expecting the full impact of IMO 2020 on Middle East exporters to be clouded so long as OPEC production cuts remain in place. “Mena exporters of sour crude grades will need to maintain their investment in upgrading refineries or targeting export markets capable of processing their crude in order to remain competitive in a post-IMO world.”
He is also expecting that markets will end up in a surplus for 2020, with a particularly heavy oversupply in the first half of 2020. He sees considerable upside barriers in their way and thus substantial gains look difficult.
“We expect Brent prices will record an average of $57 per barrel, down $2.50 per barrel from our previous forecast and a drop of 11 per cent year-on-year from our 2019 price target. For WTI, we expect prices at around $55 per barrel, down by $1.90 per barrel from our previous expectations and a drop of 5.5 per cent from our 2019 target”, he said.
The OPEC group of oil producing countries and their allies – including Russia – have agreed to a production cut of 500,000bpd in addition to their current agreement, bringing production 1.7 million bpd below October 2018 levels.
A Chief economist at Abu Dhabi Commercial Bank, Monica Malik, expects global oil demand growth to increase modestly to 1.1 million barrels a day in 2020 after slowing to an estimated multi-year low of 0.9 million bpd in 2019.
“Against this backdrop, we retain our Brent crude forecast for 2020 at $62.5 per barrel, though we adjust our 2019 estimate marginally down to $64.0 per barrel from 64.7 per barrel”, Malik said in a note.
Head of Commodities and Derivatives Research at Bank of America Merrill Lynch, Francisco Blanch, projects an average Brent price of $60 a barrel in 2020.
“We believe spot prices could rise to around $70 a barrel by mid-year. Diesel prices, further boosted by a big surge in marine gasoil demand on the back of IMO 2020 regulatory changes, could approach $100 per barrel in the first half of 2020”, Blanch said.
But, Slava Kiryushin, Dubai-based global head of energy at DWF, is expecting that there will be an oversupply.
According to him, “even the new shipping fuel regulations set to be implemented in January 2020, known as IMO 2020, are not expected to change this trend despite potentially leading to an increased demand for low-sulphur gasoil and diesel. No doubt that the growth of the oil supply is a sensitive topic for OPEC+ members as 500,000 barrels a day were agreed to be cut from OPEC’s supply. Overall, the market is less optimistic over the ‘revival’ of the oil price.”