IMO 2020

Hot Commodity

Hot Commodities

Hot Commodities

Hey All,

The PanXchange team attended the sixth annual NoCo Hemp Expo last week in Denver. With over 200 exhibitors, NoCo is the largest gathering of hemp industry professionals from across the supply chain. CEO Julie Lerner had the opportunity to speak on the topic of market evolution during the conference, and we’re excited to grow with the industry as we prepare to on-board members to our hemp trading platform starting next month.

We also released our March Hemp Report last week. Find the full report and sign up for the email list here.

IMO 2020

Arguably one of the most significant changes to the petroleum industry is unfolding relatively under the radar. The International Maritime Organization (IMO) is rolling out new sulfur limits for bunkering fuels for January 1, 2020. The new regulations limit the sulfur content of marine fuels to 0.5%, down from the current 3.5% for all ocean-going vessels. The IMO initially adopted this plan in 2008, and confirmed the conclusions in 2016. Despite the long lead time in regulations, there is a good chance this will cause major disruption in global shipping markets when regulations begin.

Currently, ocean-bound vessels have a multiple fuel burning system, using low sulfur and other emissions distillate fuel when in ports, and marine fuel oil, also called residual fuel oil (RFO) or bunker fuel, when outside of territorial waters. Residual fuel oil is the bottom of the distillate stack, a thick, viscous fluid that requires a diluent like diesel under certain temperatures. Because the fuel is the bottom of the barrel and emissions are heavier, it’s rarely used in land vehicles and significantly cheaper than gasoline and middle distillates. In the U.S., around 80% of total residual fuel oil is used for marine bunkering.

For ship owners, there are three major options to adhering to the sulfur emission limits. They can upgrade systems with scrubbers to clean the sulfur out of the exhaust, buy compliant fuels from refineries which would require the refineries to increase the amount of 0.5% RFO they produce, or they can switch their systems to non-petroleum distilled fuels, primarily LNG.

Installing scrubbers on a ship can run in the range of a few million up to tens of millions of dollars, depending on the size and age of the vessel. Owners will have to weigh this price against what the increase in expected sulfur-reduced fuels will cost in the ports most frequented per ship. What makes this particularly tricky is that refiners are not bound by these specific rules, but will need to somehow coordinate with hundreds of shippers in the decision between the three options so that sufficient supply of low sulfur fuel oil will be available.

EIA projects (PDF) that the high-sulfur RFO consumed by U.S. ocean-going bunker fuel to drop from 58% in 2019 to 3% in 2020. While there has been an increase in orders for scrubbers, the number of ships expected to have fully installed scrubbers is low. This means that ship owners in the U.S. will switch a major portion of purchases to distillate fuel oil, a smaller amount to LNG, and the remaining will be low-sulfur RFO.

As we’ve mentioned numerous times in past editions, with the U.S. shale revolution bringing a lighter slate of crude oil and smaller amounts of middle distillates, the distillate market has already seen major strength relative to gasoline markets. With a huge and somewhat sudden increase in demand starting in late 2019 and hard line on Jan 1, 2020, the distillate markets could end the year with some major fireworks.

Singapore Seeks Prison for Cheating Emissions

The Singaporean government is not taking skirting the IMO 2020 sulfur restrictions lightly. The Marine and Port Authority of Singapore announced that ship captains who burn sulfur about the IMO limits could face up to 2 years in prison.

Singapore is a major global hub of bunker fuel, selling just under 50mm metric tons of the fuel used in shipping in 2018, the majority being Marine Fuel Oil 380 CST. While low-sulfur fuel oil sales increased in recent years, they remain a minuscule portion of the overall market at under 1%. Non-low sulfur marine fuel oil accounted for over 90% of the total for December 2018 sales.

While a jail sentence seems extreme, it would likely only be used in cases of willful breaking of the law such as falsifying documents or obstructing investigations. But with the overwhelming majority of the market still relying on non-compliant fuels, the likelihood of fines by shippers not complying with standards is high.

Source: Maritime and Port Authority of Singapore

Traders Turn to LNG

With global margins narrowing in crude oil, commodity tradehouses are eyeing the LNG industry. Major tradehouses like Gunvor Group Ltd., Trafigura Group Pte. Ltd. and Vitol SA have been buying up physical assets including LNG tankers, liquefaction terminals, and regasification facilities. With major producers and buyers (turning away) from long term contracts and new facilities continually starting up, the spot market will continue to grow and arbitrage and high margin opportunities

And one extra spot where demand should grow is with IMO 2020 regulations. EIA projects that LNG share of bunkering fuel grows to 7% in 2030 and 10% by 2050. As the end of the year nears and regulation deadline becomes real, global LNG markets will see some major volatility. But with increased transparency, how long margins will stay high remains a question.

Exchange Offerings Don't Bridge Logistics Gap

Morningstar Commodities Research analyzed the two new exchange contracts from CME and ICE for physical crude delivery for export. Findings: “In truth,while these exchange auctions increase futures liquidity and market transparency in Houston, they only provide a half-baked solution for the needs of exporters.”

Freight Futures Contract

Freight Waves, in partnership with DAT and Nodal Exchange, launched the first financially settled trucking freight futures contract on March 29th. FreightWaves reported that the first trade was executed within the first 20 minutes of opening.

The contracts will be financially settled against DAT dry van spot rates, and include seven origin/destination lane contracts and four regional and/or national average contracts.

Full information can be found here. Congrats to the FreightWaves, DAT, and Nodal team! We’ll be following this contract closely.

Majors Saying Blockchain Yet to Live up to the Hype

As major cryptocurrency markets rallied over 10% in the past week after months of low volatility, a few major players publicly announced skepticism about the underlying blockchain technology.

Bank of America, who holds the most patents related to blockchain of any firm in the financial services industry, is growing relatively skeptical about the blockchain revolution. In an interview with CNBC, Cathy Bessant, tech and operations chief or the firm says, “What I am is open-minded… In my private scoreboard, in the closet, I am bearish.”

Shortly after, both Wells Fargo and Mastercard CEOs said blockchain has yet to live up to the hype.

Could this pessimism mean a bottom in the blockchain market, and the actual revolution is on the way? Stay tuned!


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-Editor in Chief, Josh Yanus