OPEC Forecasts Falling HFO Prices and More Scrubber Orders

In its latest annual report on the world’s oil market outlook, OPEC has lowered its prediction for non-compliance with the IMO 2020 fuel sulfur content regulation. The organization now forecasts a non-compliance rate of 25 percent when the rule takes effect, reduced from an estimate of 40 percent issued the same time last year.

Counter to the views of many maritime industry participants, OPEC expects that a sharp price spread between low-sulfur fuels and high sulfur fuel in the post-2020 bunker market will drive a strong uptake of scrubber technology. This will help to reduce non-compliance, OPEC predicts, and the rate could fall to just 10 percent by 2023, «in line with the increasing number of vessels with on-board scrubbing facilities.» OPEC predicts that scrubber orders will take off only when this price spread occurs, not before, since there is currently no financial advantage in paying for a multi-million-dollar retrofit package.

The forecast is based on predictions about the economics of refining. Uncertainty about scrubber uptake and the future mix of the marine fuel market are deterring investments in low-sulfur-fuel refining capacity: if scrubbers succeed in gaining widespread acceptance, the refineries that buy expensive equipment for making low-sulfur fuel oil might not be able to recoup their costs, OPEC suggested. Since refiners are not working to alter their physical plants, the market need for compliant fuel will likely be met by larger refinery runs, which will produce more of every product type. The increased volumes of middle distillates will be used to dilute high-sulfur fuel to meet IMO standards. Ironically, the rise in refinery runs will also mean that production of high-sulfur fuel oil will increase — further lowering the price of HFO, and raising the advantage of scrubbers.

Separately, OPEC made an implicit prediction that the marine sector will not make progress towards its goal of a 50 percent reduction in CO2 emissions by mid-century. In its reference case, OPEC forecasts that marine bunker consumption will grow by 1.1 million barrels per day by 2040 (below), an increase of 25 percent. This demand growth implies an equivalent percentage increase — not decrease — in the sector’s CO2 emissions.


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