Author: admin

What lies in store?

Patrick Kulsen and René Loozen of Insights Global consider the impact of COVID-19 and IMO 2020 on bunker fuel consumption and ARA tank storage demand.

The assumption is that the current lockdown lasts three months and has a negative impact on marine fuel bunker consumption levels. After the lockdown, the consumption level will gradually normalise, which will take five years.

The real impact of COVID on global and regional GDPs is not clear yet, but we may conclude that the IMO 2020 regulation have had a positive impact on the ARA tank storage demand.

As we are now well into the second quarter of 2020 it is useful to look back on the introduction of the recent IMO legislation on the regulation of sulphur emissions from bunker fuels. The dust has settled with respect to the implementation of these new rules. But as this happened a ‘black swan’ arrived on the global oil scene: COVID-19 or the Coronavirus. This pandemic and the international crisis it evoked is gripping international trade and impacting on shipping and bunker sales like nothing we have ever seen before. So, this article will also look forward to estimating the medium-term impact on bunker markets and, in particular, on bunker storage markets.

Run-up to 2020

The International Maritime Organization’s (IMO) regulation mandating a reduction in the sulphur content of marine fuels to 0.50% or below came into effect on 1 January 2020.

Leading up to the start of this new era in marine fuels there were multiple opinions or scenarios about which bunker fuels would become dominant. In first instance, most stakeholders thought high sulphur fuel oil (HSFO) would remain a dominant bunker fuel because of the expected uptake of scrubbers. Other stakeholders assumed that marine gasoil (MGO) would become main bunker fuel as there wouldn’t be enough supply of 0.50% very low sulphur fuel oil (VLSFO). Some oil majors, the International Energy Administration (IEA) and consultants then changed their opinions, believing that VLSFO would become the dominant fuel. There were other stakeholders, like the gasoil traders, who thought that the demand for MGO would increase significantly because of IMO 2020.

The first months of 2020

The first months of 2020 have shown that VLSFO seems to be the dominant bunker fuel. Consumption of MGO increased only slightly by around +10%. HSFO accounts for about 20% of total fuel oil consumption, with the rest being mostly VLSFO.

The introduction of the new VLSFOs has led to some compatibility concerns. VLSFO blends can come from residual components and distillate components. Residual components are mostly aromatic due to the asphaltenes in the bottom of the barrel. Distillates are high on paraffins. Blending these two streams together can lead to compatibility issues. This can occur if a ship switches between different batches and the fuel is mixed in the ship’s fuel tank, a process also known as commingling. The co-mingling of bunker fuels from different origins could lead to serious damage to engines or the clogging of fuel lines. VLSFO residue blends, being more aromatic, and hydrotreated vacuum gasoil (VGO), being less aromatic have these compatibility issues.

These compatibility issues also have an impact on the demand for storage capacity as some product owners have taken steps to avoid commingling new fuels in their tanks. So, this calls for segregated tanks, which will increase demand for tanks.

An important and lucrative business for oil traders in the Amsterdam-Rotterdam-Antwerp (ARA) region used to be the transhipment of fuel oil from Russia to the Far East. However, this transit flow has largely disappeared. On the one hand, the supply of Russian fuel oil has gone down whereas the demand for fuel oil in Asia has also dropped significantly. Furthermore, Asian bunker demand for fuel oil is currently being supplied from other closer regional sources. Nowadays, Russian exports are being directly exported in smaller tankers, with the US as the main destination. The ARA is no longer the heavy fuel oil transhipment hub.

Looking ahead

Our assumption in the post-2020 era is that the shipping industry will keep on using fuel oil as the dominant marine fuel (80%) but it is unclear is what the respective shares of VLSFO and HSFO will be.

In our forecasting models, the Corona effect is incorporated. The assumption is that the current lockdown lasts three months and has a negative impact on marine fuel bunker consumption levels. After the lockdown, the consumption level will gradually normalise, which will take five years. Our assumption of five years is based on experience in the past and the enormous fall of GDP which influences the consumption of fuel oil.
The International Monetary Fund (IMF) forecasts a 3% contraction of global GDP in 2020, while the Eurozone will see a decline of 7.5% in 2020. It will take several years of GDP growth to be back at the same GDP level as in 2019. The consumption of bunker fuel is heavily correlated with global trade, so we expect it will take several years before bunker fuel market is at the same level as in 2019.

Due to growing bunker fuel consumption and declining average production, surplus in NW Europe will change into a deficit. Terminals in ARA specialising in fuel oil will benefit from the growing size of the fuel oil bunker market. As the number of grades has increased and more components are needed to blend into VLSFO / HSFO / MGO, more storage capacity is needed.

Additionally, on top of these structural effects on fuel oil supply, demand and imbalances, there is an enormous oversupply in the market due to the COVID-19 crisis. This has resulted in a steep contango in fuel oil forward prices and is stimulating traders to buy and store excess fuel oil supply. This provides major support for fuel oil storage rates in the short to medium term.

So, in summary, the introduction of the IMO 2020 regulation and the COVID-19 crisis have had the following impact:
• More tanks needed to segregate and blend fuel grades
• Less arbitrage flows limit the demand for large tanks
• Long term bunker demand growth and rising imbalances will support tank demand
• Short to medium term support of fuel oil storage rates due to steep contango.

The real impact of COVID on global and regional GDPs is not clear yet, but we may conclude that the IMO 2020 regulation have had a positive impact on the ARA tank storage demand. Also, in the short to medium term, the COVID-19 / Corona crisis has had a positive effect on the tank terminal business.

Bunkerspot article

Rene Loozen and Patrick Kulsen contributed to Bunkerspot’s June/July 2020 edition. The article contains IG’s view on the impact of the IMO 2020 and the Corona pandemic on bunker storage markets.

When you fill in this registration form, you are able to download the full article from Bunkerspot.

The Most Dramatic Year In The History Of Oil

There are very few industries in the world that have been hit as hard or are set to face as many consequences as the oil and gas industry in 2020. In a recent report, Fitch Ratings forecast that oil and gas exploration and production companies would lose $1.8 trillion in revenues this year, which is six times more than the retail sector is set to lose.

But the long-term consequences are going to be even more devastating. Perhaps the most visible change taking place in the oil and gas industry is the drastic cost-cutting measures being taken by the oil majors. BP has been forced to cut 10,000 jobs, or 15 percent of its workforce, as it tries to control costs in this new low oil price environment. Schlumberger had already slashed salaries and cut jobs in late March, while Shell and Chevron have announced plans to shrink their workforces.

And it isn’t just in the workforce where we are seeing unprecedented cuts. Shell’s decision to cut its dividend for the first time since 1945 was probably the single largest indicator of the long-term impact this pandemic will have on the oil industry. Shell and its fellow oil majors have prided themselves on paying out dividends regardless of market conditions in order to keep their shareholders happy. Its decision to cut its dividends marks a shift in strategy that suggests the oil major is now determined to cut its debt going forward and focus on financial sustainability rather than just pleasing shareholders.

It remains unclear if oil demand will ever return to pre-pandemic levels. From the destruction of the aviation industry to the transformation of workplace dynamics reducing daily travel and governmental pushes for renewable energy, oil demand is being attacked on all sides due to COVID-19. The oil majors seem to have recognized this global shift and are determined to make their operations as lean and sustainable as possible.

2020 is shaping up to be the most dramatic year in the history of oil markets, with a decade’s worth of change seeming to be taking place in just 365 days.

Author: Charles Kennedy, OilPrice.com – June 10, 2020

Trafigura posts record H1 oil trading earnings as market volatility soars

London — Trafigura, the world’s second-largest independent oil trader, said June 11 it benefited from “exceptionally strong” earnings from physical oil trading during the first half of the year when price volatility and supply dislocatoins spiked because of the coronavirus pandemic.

Register Now Reporting a 27% year-on-year jump in net profit for the first half to $542 million, Trafigura said its oil and petroleum products division delivered its highest H1 profit on record.

Gross profit from oil trading totaled $2.13 billion, up from $1.04 billion a year earlier and represented 68% of Trafigura’s total gross profit, the company said.

“At times like these, the physical trading and risk management activities of specialist companies such as Trafigura become more relevant than ever,” CFO Christophe Salmon said in a statement.

“The exceptionally strong performance in oil trading came in the context of significant volatility and dislocations in the global market for crude oil and refined products.”

Upbeat on H2

Trafigura said its shipping and chartering business also delivered a “very strong performance” having increased its fleet and equity position to benefit from anticipated IMO 2020 market disruption.

Brent crude prices dived over 60% over the first quarter to near two-decade lows after sweeping lockdowns hit demand and OPEC+ producers briefly abandoned their supply cut deal.

Demand for jet fuel was particularly hard hit, with 80% or more of the market disappearing as airlines grounded their fleets. Gasoline consumption also collapsed in many areas, Trafigura said.

“In the oil market, we saw, for a time, prices and curves moving from backwardation to contango and back again. Volatility broke all records,” Trafigura said.

Looking ahead, Trafigura said it expects to continue benefiting from market volatility in the H2 as the world economy slowly recovers from the pandemic.

“Trafigura is a highly resilient company that is providing reliable and valuable services to producers and consumers of vital commodities,” Salmon said. “…we see every reason to be confident that this will continue to be the case for the second half of our financial year.

Author: Robert Perkins, Editor: Felix Fernandez, Platts, June 11, 2020

Oil traders expect stocks to start falling this month

LONDON (Reuters) – Crude traders are anticipating a substantial reduction in global stocks over the next year as consumption recovers after the coronavirus epidemic and output cuts by OPEC+ and shale producers whittle away excess inventories.

Brent calendar spreads have tightened progressively since the middle of April as the major economies have begun to re-open after locking down in March and oil producers have started to cut output.

Brent futures’ six-month calendar spread has shrunk to a contango of less than $2 per barrel from a recent high of $12-$14 between late March and late April.

In the physical market, the five-week spread for dated Brent has flipped into a small backwardation of 15 cents per barrel from a contango of more than $6.

Brent spreads have historically been a good proxy for the global production-consumption balance as well as inventories in the United States.

Since the early 1990s, contango has corresponded with periods when the market was oversupplied and stocks have been rising year-on-year, while backwardation has correlated with falling stocks.

The recent shift from a wide contango towards a flat structure and even into backwardation for nearby dates therefore indicates stocks are expected to start falling soon, with the first draws in June or July.

Traders’ expectations expressed via the Brent spreads are consistent with the gradual drawdown in global oil stocks predicted by the major statistical agencies.

The U.S. Energy Information Administration forecasts U.S. crude inventories will fall by 230,000 barrels per day (bpd) in the second half of the year after increasing by more than 800,000 bpd in the first six months.

The agency predicts the U.S. market will move into a supply deficit of 200,000 bpd as early as July having been in surplus by 1.8 million bpd in April (“Short-Term Energy Outlook”, EIA, June 9).

U.S. commercial crude inventories (including stocks temporarily stored in the strategic petroleum reserve) are predicted to fall from 580 million barrels at end-June to 540 million by end-2020 and 510 million by end-2021.

OECD stocks of crude and products are forecast to decline almost 1.2 million bpd in the second half of 2020 and 0.8 million bpd in 2021, reversing an increase of 5.2 million bpd between March and May this year.

Globally, EIA forecasts inventories will fall by an average of 3.0 million bpd for the second half of 2020 after rising by at an average of 9.4 million bpd between January and May.

There is now a dominant view that the market will rebalance over the next 18 months, provided OPEC+ maintains its commitment to reduced production, U.S. shale output does not surge again, and there is no second wave of coronavirus.

(John Kemp is a Reuters market analyst. The views expressed are his own)

Author: John Kemp, Editor: Elaine Hardcastle, Reuters, June 10, 2020

New tests into degassing barges in North Sea Port successful

Testing of vapour processing installations began in Vlissingen, North Sea Port on Thursday 28 May. The aim is to enable inland tankers to process residual vapours safely and in a controlled manner with a newly developed installation. The initial tests were successful, North Sea Port says in a press release.

The industry has already achieved a significant reduction in emissions in recent years by introducing ’dedicated and compatible’ sailing, eliminating the need for degassing. However, this is not in itself sufficient to avoid degassing completely. In 2020, the prohibitions will therefore be gradually extended to a national ban that will reduce emissions of these harmful substances by 98%.

Degassing a vessel while sailing along inland waterways is bad for air quality, for the health of local residents and for people who work with these substances. Since 2015, the provinces of Zeeland, Noord-Brabant, Zuid-Holland, Utrecht, Noord-Holland, Gelderland and Flevoland have already introduced bans on the degassing of benzene and substances containing benzene.

The aim of the tests is to achieve cleaner air along the waterways with the help of innovative technologies. The tests at North Sea Port went well. The functioning of the equipment was monitored throughout the testing procedure.

These tests are the first of a series with different types of installations being rolled out in the ports of North Sea Port, Rotterdam and Amsterdam. The measurements are being conducted by an independent agency that will determine which installations meet the strictest requirements and where improvements are still needed. The results of the trials will be evaluated by the ‘degassing while sailing taskforce’, which will then advise the responsible Dutch minister on the further construction of the infrastructure.

The test in Zeeland is being supported by Shell Chemicals Europe. The site in Vlissingen has been provided by North Sea Port as part of its aim of achieving a more sustainable port. The province of Zeeland supports the project. Zeeland also currently holds the chairmanship of the national ‘degassing while sailing taskforce’. GreenPoint Maritime Services is supplying the vapour processing installation being used in the tests.

The Dutch Minister of Infrastructure and Water Management, Cora van Nieuwenhuizen, set up a ‘degassing while sailing taskforce’ in 2018 in order to ensure the smooth implementation of the national ban. From this year, the task force has been chaired by Dick van der Velde, a member of the Zeeland provincial executive. The task force includes representatives of central government, the provinces, ports, shippers, hauliers, storage companies and vapour processing firms. In order to facilitate the introduction of the national ban, it is important to build up an infrastructure consisting of innovative installations capable of processing or reusing the vapour cargo residues.

PortNews, June 9, 2020

Register for ARA Oil Tank Terminal Sample Report

Register today, to prepare for tomorrow!




    Key learnings ARA Tank Terminal report

    Important questions that need to be answered first before choosing a strategic direction. Recent events has shown just how volatile oil markets are and justifies in-depth market intelligence that enable intelligent decision making.

    1. COVID-19: Covid-19 outbreak and its impact on oil markets.

    2) IMO 2020 and changed bunkerfuel specs: Effect on fuel oil consumption, on MGO and growing storage demand.

    3. Electrification of passenger cars: Downward effect on gasoline consumption and its positive impact on storage demand.

    4. Reverse dieselization of European passenger car sales: Change in car sales might decrease structural imbalances and negatively impact storage demand.

    Insights Global’s ARA Tank Terminal Annual Market Outlook Report will cover:

    1) Our outlook for oil products supply, demand and trade flows and its impact on tanks storage demand.

    2) Oil price forward curve outlook and its impact to tank storage markets

    3) Tank storage capacity developments

    4) Tank storage rates developments

    5) View on medium term profitability

    Themes that impact ARA Oil Tank Terminal Market

    The tank terminal market in ARA is facing several challenges and issues that influence the short- and mid-term dynamics. Oil market developments, globally and regionally, could have an impact on the ARA Oil tank terminal market.

    We have selected three main themes that impact ARA oil Tank Terminal markets in the short and medium term:

    COVID-19 outbreak: Increase in tank demand and storage fees due to massive oversupply on petroleum markets (deep contango)

    IMO 2020 and changed bunker fuel specifications: Growing ARA tank storage demand

    Electrification of passenger cars: Downward effect on road fuels consumption but mixed effects on tank storage demand

    Reverse dieselization of European passenger car sales: The change in car sales might decrease structural imbalances and lead to less demand for tank capacity

    COVID-19 outbreak

    Since the beginning of the Corona crisis the market is clearly in contango. Looking to the calendar spread it was already expected that market would move into contango on a short term. However, the Corona crisis was the big trigger for the start of the contango period. As the graph shows the market is in a deep contango and how long this situation will persist is the main question. It depends on how fast the production and demand of oil products will become in balance again.

    As we all experience the impact of Covid-19 is huge on our daily life and therefore also on our fuel consumption. The Corona effect needs to be incorporated on the forecasting models. Assumption is that the current lockdown lasts three months and has a negative impact for all fuels with the exception of heating oil. Reduction of diesel and LPG volumes are a bit lower because both diesel and LPG consumption is not limited to passengers’ vehicles. Commercial vehicles like buses and trucks don’t use gasoline fuels but usually diesel or LPG. Jet-kerosene is very much hit as almost all passenger traffic has stopped.

    Reduction lockdown

    LPG: 27%

    Naphtha: 40%

    Gasoline: 70%

    Jet-kero: 95%

    Heating oil: -20%

    Marine gasoil: 30%

    Diesel: 50%

    Fuel oil: 30%

    Reduction after lockdown in 2020

    9%

    13%

    23%

    32%

    -3%

    10%

    17%

    10%

    After the lockdown, consumption level will gradually normalise, which will take five years. However, it is unclear yet what the exact impact of Covid-19 will be on the travel behaviour of people.

    IMO 2020

    The International Maritime Organization (IMO) has implemented its global legislation to limit sulphur emissions as a result of marine fuels. The legislation calls for a reduction of the sulphur content in marine fuels to less than 0.5%, which has started January 1st, 2020. Until the start of 2020 the limit was 3.5%. The first months of 2020 show that VLSFO seems to be the dominating bunker fuel. Consumption of MGO increased only slightly by around +10%. HFO is about 15-20% of total fuel oil consumption, with the rest being mostly VLSFO.

    The consumption of bunker fuel is heavily correlated with global trade, so we expect it will take several years before bunker fuel market is at the same level as in 2019. However, terminals in ARA specialized in fuel oil will benefit from the growing size of the fuel oil bunker market. As the number of grades has increased and more components are needed to blend into the 0.5%FO / HSFO / MGO, more storage capacity is needed.

    Additionally, on top of these structural effects on fuel oil supply, demand and imbalances, there is an enormous oversupply in the market due to the COVID-19 / Corona crisis. This has resulted in a steep contango in fuel oil forward prices and is stimulating traders to buy and store excess fuel oil supply. This provides major support for fuel oil storage rates in the short to medium term.

    Electrification of passengers’ cars

    Electric mobility is growing very fast. In 2018, the global electric car fleet exceeded 5.1 million, up 2 million from the previous year. China sold over 1 million cars in 2018, followed by Europe (385,000) and US (361,000). Norway has the highest market share for sales (46% in 2018). According to the IEA the projected growth in the New Policies Scenario of electric vehicles would cut oil products by 2.5 million barrels/day.

    In a push to limit GHG emissions originating from vehicles the European Commission has imposed emission targets to car-producers. New cars are tested and need to have CO2 emissions lower than a certain limit. This limit has been gradually lowered to an average of 130 gram per kilometre in 2015 and will be lowered even further to 95 gram per kilometre as from 2021. CO2 emissions are directly proportional linked to fuel efficiency and therefore have a direct effect on consumption volumes per car per kilometre. As from 2025 the EU emission target is -15% relative to 2021. As from 2030 the target is set on -37.5% relative to 2021.

    If car manufacturers do not comply to these targets, they will get penalties because of non-compliance. As BEV’s count as zero emissions cars, it is expected that these targets drive the production of electric cars.

    However, reality is different as EU average car emissions are increasing again, see figure 5.6b. Higher SUV sales and not diesel decline have resulted in higher CO2 emissions.

    Nevertheless, this electrification trend will have an impact on the gasoline consumption. In ARA the port of Amsterdam plays a central role in the gasoline segment. Because Europe has a structural surplus of gasoline there is a continuous flow being exported out of Europe to gasoline outlets. Consumption of European gasoline is expected to decrease, mainly because the electrification of its car fleet. As the production of gasoline will not decline or not decline that fast, it is expected that the surplus of gasoline will increase, which is beneficial for terminal operators.

    Reverse dieselization of European passenger car sales

    Due to a mix of governmental policies and changes in consumer preferences the share of diesel-powered cars relative to total cars sales has shifted dramatically in Northwest Europe. Consequently, the consumption of diesel is decreasing and it is expected this trend will continue. As production of diesel will not decline or not decline that fast, the deficit of gasoil / diesel is expected to decrease, which is not beneficial for terminal operators.

    Conclusion

    Although the oil market is really hit by Covid-19, the direct impact on oil terminal operators is positive as the market is currently in a deep contango. Consequently, tanks are rented out and storage fees have increased significantly.

    Other themes like IMO 2020 and electrification of passenger cars seem to have positive effects on the profitability of terminal operators. IMO 2020 create more tank storage demand because of a higher number of bunker fuel grades and more components that are needed, while for gasoline the structural imbalance is expected to increase.

    However, for the storage demand for diesel is expected to decrease because the current deficit is expected to decrease.

    Having access to accurate, up-to-date oil storage rates is crucial to make the right business decisions.

    With our Global Oil Storage Rate Report, you’ll gain access to the single and only authoritative source of storage rate information available worldwide. It will provide you with transparency on price levels in global tank storage markets regularly, so you are always in the know and can set the right ask and bid prices for your storage.

    Download your FREE Sample Report now and discover what information you could have at your fingertips each quarter.