OPEC forecasts 2020 problems and increased demand for tankers

OPEC forecasts 2020 problems and increased demand for tankers

Malcolm Latarche

Malcolm Latarche · 02 October 2018


Shipbrokers and energy specialist Poten and Partners have released their take on the recently published annual long-term World Oil Outlook from the oil producing body OPEC. The report from OPEC covers the period through to 2040.

OPEC is relatively optimistic about the prospects of long-term crude oil demand, although demand for its own crude is expected to come under pressure in the next five years as a result of surging US supplies. In their 400-page report, the OPEC analysts touch on a wide variety of topics, including regional shifts in GDP and population growth, the changing competitiveness of the various fossil fuels (natural gas, coal and oil) relative to each other and compared to renewables.

OPEC sees the 2020 fuel changes resulting from the IMO global cap on sulphur as being disruptive to both the shipping and refining sectors and thinks that it will have a noticeable impact on crude runs. In their “Reference Case”, OPEC assumes that only about 70% of shipowners will comply with the new rules (have scrubbers or switch to low sulphur bunkers or other compliant fuels). However, despite the IMO’s efforts to enforce the regulation, OPEC expects that there will be a significant level (up to 30%) of non-compliance, especially in the early implementation years. The relatively low level of scrubber penetration as well as the potential lack of compliant fuel are cited as the main reasons.

Overall, OPEC is bullish about scrubbers. They expect that scrubber penetration will accelerate after a slow start. The year 2018 started with less than 500 vessels that had installed or ordered scrubbers. By 2020, OPEC expects this number to reach 2,000 vessels, growing to 4,500 – 5,000 vessels in the medium term. This scenario implies that, while the use of Low Sulphur Fuel Oil (LSFO) and gasoil will initially jump in 2020, the increased penetration of onboard scrubbers will support continued use of High Sulphur Fuel Oil (HSFO) over time.

Poten states that the OPEC report correctly points out that there remains a lot of uncertainty surrounding the bunker fuel mix. As a result, the global refining industry is reluctant to make significant investments to make more compliant fuel available. They will wait and see how the situation develops. Sophisticated refiners do have some flexibility to change their yields to maximize the output of middle distillates and LSFO. However, they will likely do this based on economic incentives and de-facto demand, rather than by anticipating uncertain future demand.

The potential implications of these developments leading up to 2020 according to Poten could be positive for the tanker market. Prices of medium and heavy sour crudes will come under pressure, while light sweet crudes will attract premiums. According to OPEC, this means that we may see more imports of medium and heavy sour crudes from Latin America and the Middle East into North America, where highly complex refiners can take advantage of this cheaper feedstock. At the same time, the light sweet crudes that are produced in the US will attract a premium in the export market. A combination of more crude oil imports and exports involving North America will be good for the tanker market. And the shift from high sulphur crudes to low sulphur crudes and vice versa will not be limited to North America. In addition to increasing tradeflows due to the differences in crude oil qualities, OPEC also expects a (temporary) boost in crude oil demand of 0.4 million barrels per day (b/d) in 2020 as a direct result of the IMO sulphur regulations. Additional refinery runs will be needed to meet the demand for additional compliant fuels.

If OPEC’s scenario plays out, this is good news for tanker owners. However, it is important to caution against too much optimism. This 400,000 b/d increase is based on a lot of assumptions and, even if they all fall into place, it can be neutralised if owners order just ten additional VLCCs.

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