The implementation of the IMO sulfur cap on marine fuels will change Latin American flows because of the impact on demand and prices for heavy-sour grades of crude oil. Many Latin American suppliers produce the heavy-sour crude good for production of high sulfur fuel oil (HSFO) and simple refiners without the capacity to trim HSFO from their yields will likely attempt to sweeten their slate to produce IMO-compliant fuels
The IMO spec change will lower the permissible sulfur content for marine fuels from 3.5 percent to 0.5 percent come January 1. Shipowners with a fleet of vessels not equipped with scrubbers that would clean their exhaust are already consuming greater quantities of low sulfur fuel oil (LSFO), shying away from HSFO. Sweeter crudes are already seeing a surge in demand because of their reduced HSFO yield relative to sour grades.
The shift not only means profound changes for refiners but also for producers of heavy-sour crudes such as Mexico and Venezuela.
Mexico’s flagship export grade Maya is a heavy-sour crude that will likely fall out of favor for simple refiners. As a result, Mexico should anticipate lower prices for Maya as IMO 2020 implementation evolves.
Demand for Maya is already strong for complex refining centers such as the US Gulf Coast that can reduce sulfur content enough to cater to IMO-related demand. Through September, Mexico exported Maya at a pace of 982,000 barrels per day, with nearly half of that going to refiners on the US Gulf Coast.
While US refiners will enjoy cheap Mexican crude, the sulfur cap will affect the coffers for cash-strapped Mexican oil company Pemex, which is already rated as junk by credit ratings agencies.
For Venezuela, the spec change is a nightmare. The country has relied on exports of its heavy-sour Venezuelan crude and is already facing severe economic pressure because of the export restrictions from US sanctions imposed in January. The US Gulf Coast was the primary importer of Venezuelan crude before January and flows are now only trickling to other destinations.
Exports of heavy-sour Venezuelan crude over the first nine months of the year averaged 704,000 bpd, compared to 966,000 bpd over the same period last year.
While some will win with IMO 2020, Venezuela and Mexico are set to be among the biggest losers.