THE global push for cleaner-burning ship fuel is threatening to drive the value of Middle East crude to a record low even as supplies are squeezed.
The discount of Middle East’s Dubai crude to London’s Brent could widen beyond US$8 a barrel from current levels around US$4, according to Citigroup Inc.
That would be the largest discount on record in data back to 2006, according to PVM Oil Associates. The spread is growing even as physical demand for Gulf grades rises as buyers try to replace barrels lost to Iranian sanctions.
The plunging prices underscore the effect on oil markets from a maritime regulation that will force vessels ranging from leisure yachts to 300,000-tonne supertankers to burn less polluting fuel from January.
The shift will hurt countries like Saudi Arabia and Iraq that produce high-sulfur, known as sour in industry parlance, while boosting the value of cleaner oils produced across Africa and Europe. But it will also create opportunities for fatter profit margins for the world’s most powerful refineries, like those in India and the US Gulf Coast.
“We expect Middle East oil to trade at larger discount to sweet crude as it tends to yield more high-sulfur fuel oil, a grade that’ll be hit by steeply-falling demand in the fourth quarter of this year,” says Nevyn Nah, an analyst with Energy Aspects. “We see the Brent versus Dubai price widening in that quarter.”
Crude grades from the Middle East tend to have higher levels of harmful sulfuric acid than oil from the North Sea, Africa or West Texas. Regulators for decades have required refineries strip out sulfur from highway fuel, making it more difficult to process Middle East crude and forcing sellers to discount its prices.
The International Maritime Organisation will add to that pressure Jan 1, putting into effect regulations approved in 2016 that require the use of marine fuel with 0.5% sulfur content or less, a change from current levels of more than 3%.
In the months leading up to 2020, the relative value of Dubai oil is set to dip as it’s “virtually impossible” to obtain ship fuel with under 0.5% sulfur from processing high-sulfur crude, according to Francesco Martoccia, senior analyst for commodities research team at Citigroup.
Processors looking to make IMO 2020-compliant fuel need to invest in more sulfur-stripping units known as hydrotreaters, or increase purchases of sweet crude, lifting the price of North Sea and African grades.
Highly complex refineries that can produce compliant fuel from pollutant-rich crudes, such as Reliance Industries Ltd’s Jamnagar plant and many US Gulf Coast refiners, stand to benefit.
The dire outlook for Middle East grades stands in contrast to a current supply squeeze, as output curbs by Opec and its allies are compounded by tougher US sanctions on Iran and Venezuela and an unexpected contamination in Russia.
Prompt deliveries of Dubai are more than US$1 a barrel more expensive than cargoes for next month, the steepest backwardation in at least 22 months, which signals the strength of the near-term market. — Bloomberg
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