Waiting on an IMO Diesel Spike

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One of the widely-held expectations concerning the International Maritime Organization’s (IMO) 2020 sulfur cap on marine fuels was that the price of gasoil/diesel would spike in the opening months of 2020, as demand for gasoil in the bunker market would strain existing supplies and push prices higher. Six weeks into the new regulatory regime and the market has yet to see that spike, with prices across the globe instead trending lower since the start of the new year.

If you are looking to assign culpability for the so far muted IMO 2020 price effect on diesel, you can start by blaming demand weakness from traditional land-based diesel markets. That existing global weakness has been enhanced by the coronavirus outbreak, which has further reduced light product demand, particularly in China.

Amidst a more muted demand response to IMO than expected, refiners are putting more product on the water in hopes of finding a workable export market. For this reason, global middle distillate exports reached the fourth highest volume on our records in January at 9.2 million barrels per day. A well-supplied market combined with slowing demand is the recipe for lower prices, and we have indeed seen diesel prices move lower to open 2020 – swept up in a swift move lower by the entire petroleum complex.

Strong global middle distillate exports in January came despite relatively deep refinery maintenance. Refineries across the globe are being further encouraged into Q1 turnarounds by poor refining margins. In the Middle East, we are seeing considerable maintenance at many of the region’s largest units. Exports from the Arab Gulf accordingly declined in January to 1.3mn bpd, their lowest volume since early 2017.

Unfortunately for refiners but perhaps fortunate for diesel consumers, the market seems to have shrugged off declining volumes from the Arab Gulf, with prices moving lower in recent weeks. The gasoil complex moved lower despite a month-over-month loss of ~120,000 bpd from the Arab Gulf because global middle distillate exports were strong elsewhere, particularly from Asia.

East Asia exports rose 5% to 1.86mn bpd in January compared to year-ago levels, while South Asian exports rose 4.5% to 690,000 bpd over the same time frame. Heightened exports from East and South Asia came as each region continues to experience a prolonged demand crunch that in January sent diesel barrels towards the exports market.

A diesel price spike tied to the IMO sulfur cap is still a matter of when than if. Eventually, demand from traditional diesel consuming industries will return, and with added demand from the bunker pool, will give upward momentum to prices. But the ongoing global economic slowdown combined with demand destruction from the coronavirus epidemic should postpone a diesel price reaction into the future, and the market impact of IMO 2020 may not be felt for months to come.