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Q&A by Argus Media: IMO 2020 effects on oil tank storage

14 Oct 2019

Global energy and commodity price reporting agency Argus Media on Wednesday (9 October) provided a marine fuels industry update:

With suppliers beginning to offer 0.5pc sulphur fuel oil (SFO) and 0.5pc sulphur marine gasoil before the 1 January start date of the International Maritime Organization's (IMO) cap on sulphur content, Argus interviewed Ernie Barsamian, founder and chief executive of oil storage tank brokerage company The Tank Tiger, about how storage demand and availability. This interview has been edited for length and clarity.

Argus: What is the short-term (three months to two years) storage cost for high-sulphur fuel oil (HSFO) and 0.5pc SFO? How do short-term storage costs compare with 2018 costs? Is short-term storage easy to come by?

Barsamian: The 3mn b/d ship bunker market has been holding its collective breath for January 2020 for quite some time now. Whether or not this production capacity even exists worldwide is still a question that needs to be answered. Of course, the magic of market pricing will quickly resolve this mystery. It always does. There is no doubt we will see sulphur spreads blow out, along with an increase 0.5pc sulphur marine gasoil (MGO) demand. But for now, ship owners have zero incentive to buy 0.5pc sulphur fuel oil although suppliers have been looking to store it. You can bet that the ship owners have already identified potential suppliers.

While the storage market has certainly prepared itself for the dynamic shift from high sulphur to low sulphur fuels, the storage rates impacted by this transition have been obfuscated by the overall prevailing and persistent backwardation market structure. These headwinds have stifled overall demand for storage and, as term contracts roll off, many have been renewed for smaller quantities of storage — or not renewed at all. This year's term rates are about 10pc lower than what we have seen in 2018. Having said that, rates on the west coast where the supply is tightest are highest at $1/bl per month. The term rates in the Houston Ship Channel and New York Harbor average 65¢/bl to 70¢/bl per month. Outside of these markets and in the Caribbean, we have seen term rates range from 45¢/bl to 55¢/bl per month. Naturally, we have seen tanks that were formerly storing high sulphur fuel oil being converted to 0.5pc SFO — a fairly simple endeavor. However, since the backwardated market has softened tank utilization, we have not seen any meaningful differentiation in storage rates between tanks used for HSFO and 0.5pc SFO.

Argus: What is the long-term (two-plus years) storage cost for 0.5 SFO and HSFO? How do long-term storage costs compare with 2018 costs? Is long-term storage storage easy to come by?

Barsamian: We have seen some new players in the form of end users in the 0.5pc SFO market, in addition to the long-standing bunker suppliers. Since some ship owners will be using MGO instead of 0.5pc SFO, there will be a decrease in overall demand of fuel oils. However, some refiners, who run a high-sulphur crude slate, will want to secure incremental off-site fuel oil storage to compensate for any heavy oil process unit downtime — vacuum units, cokers, etcetera — that might otherwise be cause for crude charge curtailment. If crude slates do not change in a meaningful way, the HSFO will have to go somewhere. There is not enough asphalt in the ground to sop up this HSFO and if we see these inventories build, certainly fuel oil storage will become much more attractive. In the long run, low-priced HSFO may become a coal substitute, making coal the eventual loser in this game.

Spot rates and sublease rates are meaningfully lower than the term rates, due to the backwardation market conditions. Terminals are seeking tank utilization, even at these lower rates, but these spot deals are contracted on a month-to-month basis as the terminals do not want to commit storage for an extended period at these lower rates. Historically, we have seen market supply imbalances (such as in the second half of 2008 and second half of 2014) where increased production quickly leads to increased inventories, which can flip the market to contango. In these instances, demand for storage can accelerate rapidly and terminals will quickly contract out available tankage at higher rates.

Argus: In which regions or cities do you see the increase for 0.5pc SFO storage? Do you think that companies should invest in more 0.5pc SFO storage or there is sufficient HSFO tankage that can be cleaned up to accommodate for the 0.5pc SFO demand?

Barsamian: We have seen a significant demand uptick for Rotterdam and Singapore — not one of our primary markets — storage. Where the incremental demand in North America will reside largely will be dependent on which refineries elect to produce this fuel. Refineries will always respond to price signals and storage hubs for 0.5pc SFO will be dependent on these sources of supply. The Limetree Bay refinery in St Croix, US Virgin Islands, may be arriving just in the nick of time.

Blending of 0.5pc SFO is going to be a solution offered by some suppliers, however compatibility of the blends — dependent on the aromaticity and toluene equivalence — needs to be predetermined. Low-sulfur paraffinic feedstocks increase the risk of incompatibility, but all the while sources of 0.5pc SFO supply will be limited. Certainly, shipowners do not want to set sail on the high seas without knowledge of the risk of precipitation of the asphaltenes. It is possible that some markets may see a significant reduction in bunker supply, as a result. MGO consumption may be the only short-term solution.

Argus: What is the short-term (three months to two years) and long-term (more than two years) storage cost for diesel? How do current short-term and long-term diesel storage costs compare with 2018 costs? Is diesel short-term or long-term storage easy to come by?

Barsamian: The backwardation in the market structure has overwhelmed the seasonal summer to winter contango, which is typically seen in the distillate curve. This has negatively impacted terminal utilization and increased supply of tankage. The 2019 term rates are about 15pc lower than what we have seen in 2018. Having said that, rates on the west coast, where the supply is tightest, are highest at $0.85 bl per month. The term rates in the Houston Ship channel and New York Harbor average 45¢/bl to 55¢/bl per month. Outside of these markets and in the Caribbean, we have seen term rates range from 35¢/bl to 45¢/bl per month. The overall supply of distillate tankage is generally much more widely distributed in many more terminal facilities than is fuel oil. As a result, bunker suppliers looking to establish MGO hubs will not have the same limitations when compared to establishing a fuel oil marketing presence. If the market remains in backwardation, traders looking to "stock up" on diesel for an IMO 2020 price kick can do it on the futures market instead of taking a physical position now with storage.

Argus: Have you seen demand increase for HSFO, 0.5pc SFO and diesel floating storage leading to January?

Barsamian: We do not cover floating storage. Having said that, there is very little incentive to take on floating storage, which is more expensive than terminal storage, given the backwardation in the market. In foreign ports such as Singapore, floating storage could be a temporary solution for suppliers who have not yet identified a reliable stream of 0.5pc SFO.

Argus: Have you seen a lot of storage companies the second half of 2019 cleaning up their HSFO storage tanks to accommodate 0.5pc SFO?

Barsamian: This will be a function of customer demand. This would be not unlike the seasonal gasoline RVP conversion. As we approach 2020, we will see a pull-down of HSFO inventory only to be replaced by 0.5pc SFO inventory. Thereis no reason why a terminal servicing customer who has a long-term lease for HSFO would not be able to convert the storage in a reasonable period of time. Over the years, we have seen terminals in store 0.3pc SFO while also servicing bunker customers with HSFO in the same facility. Provided that line flushing procedures are systematically adhered to, there is not a meaningful risk of sulfur contamination in these instances.

Source: Argus Media
Published: 14 October, 2019


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