Gasoil prices set to rocket in 2015

New fuel emissions legislation will see ship owners switch to gasoil.

New legislation means that tankers will have to use fuels with a maximum of 0.1% sulphur content.
New legislation means that tankers will have to use fuels with a maximum of 0.1% sulphur content.

New fuel emission standards for tankers travelling in waters around Europe and North America, could prompt a spike in the price of European Gasoil next year, according to news agency Reuters.

From January 2015, ships entering "Emission Control Areas" (ECAs) in the Baltic, North Sea and English Channel and around the North American coast, will have to switch from low sulphur fuel oil (LSFO) with 1 percent sulphur content to 0.1 percent gasoil, in a crackdown on marine pollution.

Industry experts believe shipowners will opt for gasoil rather than using exhaust filter systems known as scrubbers or alternative fuels such as liquefied natural gas (LNG), because of high investment costs, long payback times, and the lack of suitable port infrastructure.

Gasoil currently trades at around a $300 premium to LSFO on a flat price basis.

This could prompt a short-term price spike in gasoil, similar to that in August 2012 when North America's ECA first came into effect, mandating a switch to 1 percent LSFO. Although this was flagged well in advance there was a run on European LSFO from June, peaking in mid-September.

"When spec changes have taken place in the past there have been spikes, but there is more spare capacity in the system now," Jonathan Leitch, head of oil product short-term analysis at consultancy Wood Mackenzie, told Reuters.

Crucially, North America is switching to 0.1 percent at the same time as northwest Europe, which could lead to a temporary reduction in middle distillates export volumes - exports that Europe relies on to help make up its shortfalls.

WoodMac calculates that some 220,000 bpd will switch from LSFO to gasoil in northwest Europe, which Leitch argued could be found from new refining capacity in the Middle East.

But traders are not convinced cheap gasoil will be so easy to find as ship owners will have to compete with existing gasoil buyers in North Africa and West Africa. This will push up prices before the market adjusts to the new demand.

 

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