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IMO 2020 expected to tighten jet fuel market in medium term

The upcoming regulation limiting the global sulfur content in marine fuels to 0.5% is expected to have a knock-on effect on jet fuel markets, panelists at a global jet fuel conference said Wednesday.

“While 2020 looks oversupplied from a total oil market perspective, it does appear that a certain part of the market — distillates — will be very tight,” Eric Lee, commodities strategist at Citigroup said, speaking at the Aviation Fuel Forum in Singapore organized by the International Air Transport Association.

“In short, shippers have three options. They can use a scrubber, which allows them to burn high sulfur fuel oil and eliminate the sulfur onboard; they can buy low sulfur fuel, which is mostly diesel; or they can cheat. On the refiner side, they need to vastly ramp up their refinery utilization, shifting yields to produce a lot more diesel and a lot less high sulfur fuel oil. That actually will be very tricky.”

Addressing questions about whether the regulation would lead to a surge in jet fuel prices, he noted the futures market had already begun to reflect a consensus of a tighter aviation fuel market in 2020.

“Broadly speaking, what is starting to be reflected in markets now is that diesel cracks will really pick up, and jet along with it. This will be a very important issue to focus on for the aviation sector. The futures prices have already started to reflect this, there is the potential for crack spreads to get wider,” he said.

S&P Global Platts assessed the Singapore December 2019 jet fuel/Brent swap crack spread at plus $17.64/b — 42 cents/b higher than the December 2018 swap crack assessed at plus $17.22/b.

The Singapore jet fuel Dubai swap crack spread saw an even wider disparity of $1.39/b over the same period.

In addition to IMO 2020, IHS Asia-Pacific chief economist Rajiv Biswas said that airlines were also exposed to other factors that will affect jet prices.

“We’ve been seeing a lot of volatility, and we expect that to continue. There’s an overlay of risks like the US-China trade war, geopolitical risks in Libya and Venezuela,” he said.

The International Maritime Organization’s global 0.5% sulfur cap on marine fuel will be in force on January 1, 2020.

Emission Control Areas as designated by the IMO including the North Sea, and seas surrounding the Atlantic, Pacific, and Gulf coasts of the US will remain at the 0.1% sulfur cap set in 2015.
Source: Platts

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