Commodities Corner: Why the IMO 2020 marine fuel sulfur limit will hurt consumers

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A new rule that sets a much lower global limit on sulfur content in marine fuel is on the horizon, leading to higher shipping costs that may ultimately force consumers to pay more for goods and to heat their homes.

Beginning on Jan. 1, the International Maritime Organization, or IMO, will set the new limit for oceangoing vessels to 0.5% by weight, down from 3.5%, which was established in 2012.

Read more about the rules for cleaner shipping fuels on Barron’s

The move will have many repercussions. Nearly “everything we consume is shipped by a marine vessel, truck, or railcar,” says Tommy San Miguel, president and CEO of SGR Energy, a fuel blending and manufacturing company, and now the “primary fuel for all three will be diesel.”

The new regulation, known as IMO 2020, will come into effect not long after the start of the U.S. winter heating season. That “timing, of course, could not be worse,” and demand for diesel will be at its highest point globally, says Phil Flynn, senior market analyst at Price Futures Group.

The IMO, a specialized agency of the United Nations, says the change will significantly reduce the amount of sulfur oxide emanating from ships and should provide health and environmental benefits.

IMO 2020 will ‘put maritime fuel buyers in direct competition with trucking, planes, trains, and other forms of transportation. That will lead to a squeeze on supply, raising the cost of goods to consumers.’

Phil Flynn, Price Futures Group

“While it sounds like a noble goal, it will come at a cost,” says Flynn. “The new fuels will tighten supply and drive up costs,” he says, adding that the IMO has said that fuel prices may increase by 20% to 30%. The rules will “put maritime fuel buyers in direct competition with trucking, planes, trains, and other forms of transportation,” Flynn says. “That will lead to a squeeze on supply, raising the cost of goods to consumers.”

SGR’s San Miguel says that consumers can expect to pay 5% to 10% or higher for goods, and at the U.S. retail level, diesel will probably reach an average close to $4 a gallon or higher by late March.

U.S. supplies of distillates, a range of refined petroleum products that include heating oil, diesel, and jet fuel, are already tight, with the U.S. Energy Information Administration, or EIA, pegging stockpiles at 11% below the five-year average for the week ended on Oct. 11.

“Marine fuel is a distillate, with the reduction in sulfur placing it in the category of ultralow sulfur diesel fuel, or ULSD,” says Brian Milne, editor, product manager at agriculture and energy analysis provider DTN. With the new rule, demand for compliant marine fuel is expected to boost ULSD prices, lifting the cost of diesel fuel and other distillates, he says.

On Oct. 14, the U.S. price for on-highway diesel fuel averaged $3.051 a gallon, down 34 cents from a year earlier, while residential heating-oil prices averaged $2.968 a gallon, down 39.6 cents from a year earlier, according to the EIA. On Nymex on Thursday, November NY Harbor ULSD futures HOX19, -0.66%  settled at $1.9481 a gallon, up almost 16% year to date.

“The fact that distillate inventories are well below last year should be concerning, especially if there is a cold winter,” says Denton Cinquegrana, chief oil analyst at the Oil Price Information Service by IHS Markit.

Refiners, low sulfur crude producers, and oil-fired power plants can benefit from the rule, says San Miguel, because oil-fired plants aren’t subject to the new regulation. SGR Energy blends heavy fuel oils for power plants and marine vessels and supplies high sulfur fuels to power plants—which will enable SGR to offer high and low sulfur grades, says San Miguel. Other companies that blend the lower sulfur fuel include Glencore PLC GLEN, -0.44%  and BP PLC BP, -0.62%.