Diesel prices could rise on new sulphur cap regulation

By January 1, 2020 the deadline to establish a sulphur cap of 0.5 percent for marine fuel from 3.5 percent by the International Maritime Organisation (IMO) would have kicked in with analysts forecasting that diesel prices will hit the roof.

According to IMO, the objective of the rule is to curb pollution from ships as high combustion of sulphur fuels is believed to lead to respiratory problems and endangers the climate. IMO ratified the new rules after series of false starts to cut ship air pollution which is linked to approximately 400,000 premature deaths from lung cancer and cardiovascular disease alone and around 14 million childhood asthma cases annually, according to a UN research.

While the climate may benefit from this provision, the operating model of many businesses would struggle. This rule has rattled ship owners globally and in Europe there is now a drive towards refining distillates as a cheaper option to comply with the 0.5 percent sulphur cap. Many ships are expected to experiment with blended fuel oils and new products which are outside of current standards.

Already the cost of producing diesel has been higher due to additional capacity and operating costs. But this new measures are expected to create an oversupply of high-sulphur fuel oil while demand for low sulphur fuel would spike which is expected to compel refiners to re-examine their models.

Analysts say over 3.5 million barrels per day of high sulfur fuel oil would need to be converted to distillates  which includes diesel, portending higher prices.

Refiners would also need to re-strategise hence they would become more selective about the quality of high sulphur crude that they purchase. It is projected to drive down demand for high crude grades increasing the price differential between both crude grades.

Refineries are certainly gearing up for the increase in diesel demand. But given the time, complexity, and expense of increasing capacity to meet the new demand, it is possible that there will be insufficient supplies when the new specifications come into effect.

Hence this is expected to drive up the price of diesel as refiners would have to pay more for sweet crudes or spend a pile of money to equip their refineries with the ability to reduce the sulphur content of the crudes they buy. Hence price differentials between petrol and diesel would grow wider from 2020.

Analysts say that diesel prices could rise significantly. Low sulfur crudes like West Texas Intermediate (WTI) will likely see demand spike as well.

But that is not the only concern about the new IMO rule. There are fears that with the absence of global standards for some of these new blended fuels that could be produced to pass the bar of low sulphur content, there may be some potential safety issues including those related to the use of compliant but incompatible bunkers which could lead to loss of power on a ship while in the middle of the ocean.

ISAAC ANYAOGU