October 21, 2019 BARRON’S M9
Commodities Corner
Shipping Fuel’s Ripple Effect
By Myra P. Saefong
A NEW RULE THAT SETS A MUCH LOWER GLOBAL LIMIT ON SULFUR CONTENT IN MA-
rinefuelisonthehorizon,leadingtohighershippingcoststhatmayultimately
force consumers to pay more for goods and to heat their homes.
BeginningonJan.1,theInternationalMaritimeOrganization,orIMO,will
set the new limit for oceangoing vessels to 0.5% by weight, down from 3.5%,
which was established in 2012.
The move will have many repercussions. Nearly “everything we consume
isshippedbyamarinevessel,truck,orrailcar,”saysTommySanMiguel,presi-
dent and CEO of SGR Energy, a fuel blending and manufacturing company,
and now the “primary fuel for all three will be diesel.”
Thenewregulation,knownasIMO2020,willcomeintoeffectnotlongafter
thestartoftheU.S.winterheatingseason.That“timing,ofcourse,couldnot
beworse,”anddemandfordieselwillbeatitshighestpointglobally,saysPhil
Flynn, senior market analyst at Price Futures Group.
TheIMO,aspecializedagencyoftheUnitedNations,saysthechangewill
significantly reduce the amount of sulfur oxide emanating from ships and
should provide health and environmental benefits.
“Whileitsoundslikeanoblegoal,itwillcomeatacost,”saysFlynn.“The
newfuelswilltightensupplyanddriveupcosts,”hesays,addingthattheIMO
hassaidthatfuelpricesmayincreaseby20%to30%.Theruleswill“putmari-
timefuelbuyersindirectcompetitionwithtrucking,planes,trains,andother
forms of transportation,” Flynn says. “That will lead to a squeeze on supply,
raising the cost of goods to consumers.”
SGR’s San Miguel says that consumers can expect to pay 5% to 10% or
higherforgoods,andattheU.S.retaillevel,dieselwillprobablyreachanav-
erage close to $4 a gallon or higher by late March.
U.S. supplies of distillates ,arangeofrefinedpe-
troleumproductsthatincludeheatingoil,diesel,and
jetfuel,arealreadytight,withtheU.S.EnergyInfor-
mationAdministration,orEIA,peggingstockpilesat11%belowthefive-year
average for the week ended on Oct. 11.
“Marinefuelisadistillate,withthereductioninsulfurplacingitinthecate-
goryofultralowsulfurdieselfuel,orULSD,”saysBrianMilne,editor,product
manageratagricultureandenergyanalysisproviderDTN.Withthenewrule,
demandforcompliantmarinefuelisexpectedtoboostULSDprices,liftingthe
cost of diesel fuel and other distillates, he says.
OnOct.14,theU.S.priceforon-highwaydieselfuelaveraged$3.051agal-
lon,down34centsfromayearearlier,whileresidentialheating-oilpricesaver-
aged$2.968agallon,down39.6centsfromayearearlier,accordingtotheEIA.
OnNymexonFriday,NovemberNYHarborULSDfuturessettledat$1.9471
a gallon, up almost 16% year to date.
“The fact that distillate inventories are well below last year should be con-
cerning,especiallyifthereisacoldwinter,”saysDentonCinquegrana,chiefoil
analyst at the Oil Price Information Service by IHS Markit.
Refiners,lowsulfurcrudeproducers,andoil-firedpowerplantscanbenefit
fromtherule,saysSanMiguel,becauseoil-firedplantsaren’tsubjecttothenew
regulation.SGREnergyblendsheavyfueloilsforpowerplantsandmarineves-
selsandsupplieshighsulfurfuelstopowerplants—whichwillenableSGRtoof-
ferhighandlowsulfurgrades,saysSanMiguel.Othercompaniesthatblendthe
lower sulfur fuel include Glencore (ticker: GLEN.UK) and BP (BP.UK).
Commodity Indexes,
Barrons.com
IntroducingBarron’sRoundtable
Providingalookatthetradingweekaheadto
helpyouanticipatemarketshifts,takeinformed
risks,andmakesmarterinvestmentdecisions.
SPONSOREDBY
An all-new
TV show on
Fox Business
Fridays at
10 PM ET