Demand for LSFOs Forecast to Spike
After March 2020, no vessel should be carrying high sulfur fuel oil (HSFO) as the International Maritime Organization (IMO) has adopted a carriage ban which states that no ships should carry fuel that contains over 0.5 percent sulfur in their fuel tanks as of 1 March. This carriage ban is expected to provide some relief to Korean oil refineries that are experiencing difficulties due to dwindling refining margins and the spread of COVID-19.
The carriage ban applies to vessels that are not equipped with scrubbers. If a vessel simply carries HSFO without burning it, the shipowner will be punished. The IMO has raised the bar for sulfur content in ship fuel from 3.5 percent to 0.5 percent.
Refining industry watchers anticipate that the low-sulfur fuel oil (LSFO) market will begin to grow rapidly from this March. To respond to IMO regulations, shippers must use LSFO or install scrubbers on their vessels or purchase LNG-powered vessels. Maritime oil experts predict that about 3,000 ships would install scrubbers by the end of this year, but this is less than half of industry expectations. Toughened IMO regulations are highly likely to lead to a spike in LSFO demand.
Korean refiners are expected to benefit from the shift in fuel demand as they have made preemptive investments in preparation for the strengthened IMO regulations. SK Innovation can supply 130,000 barrels of LSFO a day from April, 40,000 barrels from SK Energy’s vacuum residue desulfurization (VRDS) facilities that will go into operation in April, and 90,000 barrels from SK Trading International (SKTI)'s offshore blending business. In particular, LSFO blended by SKTI is highly profitable, as it is sold US$30 more per ton than light oil in Korea and US$10 more in Singapore.
Hyundai Oilbank has been selling very low sulphur fuel oils (VLSFOs) since late last year. It has developed a new production process to enhance the stability of mixed oils and applied it to its Daesan Plant in South Chungcheong Province. The plant produces up to 50,000 barrels of LSFO per day.
GS Caltex is responding to demand by providing the low-sulfur oil that it had previously sold to industrial plants. S-Oil has stopped selling HSFO and is selling LSFO after blending it.
Industry watchers expect the refining margin, in particular, that of LSFO, to rise beginning the second quarter of this year. The refining margin, a key indicator of oil refinery earnings, fell to the US$1 range in November 2019 and has remained below US$ 1 until this month. The refining margin broke through the breakeven point of US$4 in the second week of February as international oil prices dropped and the utilization rate of Chinese refinery plants fell due to the influence of the COVID 19 virus.