OIL & GASEXCLUSIVES Oil seen hitting $100p/b on compliance with lower sulphur marine fuel - BUSINESSDAY
Despite prevailing conservative agreement in the oil market, there are chances that oil price will jump to higher price level this year driven by race to comply with new marine fuel regulation, according to a new report from Bank of America Merrill Lynch.
The bank said that the Brent options market only implies a 2 percent chance that Brent spikes to $100 per barrel. It, however, believes everyone might be underestimating these odds. The “massive surge in distillate demand” later this year could “potentially push oil prices above $100 per barrel”, the bank projected.
The potential price spike, even though it may be temporary, is good news for Nigeria which relies heavily on oil revenue. But the country can only benefit if it can pump more oil and grow its refining capacity, analysts say.
“Prices can spike due to the new marine fuel regulation but Nigeria may not reap much benefit and such spikes are short-lived,” Ayodele Oni, energy partner at Bloomfield Law Practice, said.
The oil market has been narrowing thanks to OPEC+ supply cuts, which took off 1.20 million barrels per day from the oil market, outages in Iran and Venezuela and a slowdown in the United States shale production.
Another straw due to the forthcoming regulations from the International Maritime Organisation (IMO) could provide an additional jolt, particularly as global inventories decline against the backdrop of a tightening market.
“With distillate inventories at the low end of the range, we see an analogy to 2007/08 when the world run out of diesel refining capacity,” Bank of America Merrill Lynch wrote in a note.
“Still, unlike the gradual tightening in diesel markets of 2007/08, the world faces a major one-off jump in distillate demand,” the bank argued, referring to worldwide regulations on marine fuels set to take effect at the start of 2020.
The IMO2020 rules lower the limit of sulphur concentration in marine fuels from 3.5 percent to just 0.5 percent, which will force ship owners to switch away from heavy fuel oils. Instead, the alternatives include scrubbing technology and a greater use of low-sulphur fuels, including distillates.
Bank of America projects that the regulations could push up distillate demand by 1.1 million barrels per day year-on-year, which comes on top of the 0.5 mb/d annual trend growth rate, and also on top of the cyclical high during winter.
Higher distillate demand could push up crude oil prices as refiners race to turn crude into distillates.
“About 60 percent of the average crude barrel can be turned into distillate with the right refining toolkit. But that figure drops below 50 percent for heavy oil, potentially curbing supply,” Bank of America wrote.
“The 2020 fuel challenge is geared towards energy efficiency, environmental pollution control, and health as well as core regulatory enforcement issues,” Dakuku Peterside, director-general, Nigerian Maritime Administration and Safety Agency, at the 73rd meeting of the International Maritime Organisation in November 2018.
“As a maritime nation, we cannot afford not to comply with the IMO standard which will also do a lot in mitigating global warming and other related environmental issues,” Peterside said.