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January 28, 2020 11:00 AM, EST

Diesel Fuel Market Stable as IMO Mandate Takes Hold

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One month after the International Maritime Organization’s mandate prohibiting the use of heavily polluting bunker fuel in cargo and cruise ships began, oil industry analysts said the diesel fuel market is stable.

As the shipping industry discards bunker fuel, it was expected that cleaner diesel would be used as a replacement. The shipping industry needs an estimated 4 million barrels of diesel a day, or other fuels, to operate worldwide. Before the mandate took effect, there were concerns that diesel availability, especially for those close to ocean ports, could become a problem for the trucking industry.

“I haven’t heard anything about any spot shortages,” American Trucking Associations Energy and Environmental Counsel Glen Kedzie told Transport Topics. “In terms of pricing, our members pay attention to pricing. But they pay more attention to availability and shortages, and we haven’t heard anything about shortages.”

Glenn Kedzie, energy and environmental counsel at the American Trucking Associations

Kedzie

According to the IMO mandate, the sulfur content of ships’ fuel must meet a 0.5% or 5,000 parts per million limit — far below the 3.5% or 35,000 ppm limit that was in place until Jan. 1. Shipping companies may continue to burn bunker fuel, but if they do, the ships must be equipped with “scrubbers,” which significantly curtail the amount of air pollution produced.

Another factor appears to be lowering worldwide demand for oil products. In the U.S., the National Oceanic and Atmospheric Administration says that in many parts of the country, winter has been milder than average. For example, in International Falls, Minn., usually one of the coldest cities in the country, NOAA said December temperatures were 3.6 degrees warmer than usual. Warmer weather, especially along the East Coast, means less use of home heating oil.

Phil Flynn, an oil analyst with the Price Futures Group of Chicago

Flynn

“We had a warmer start to winter, which has made more fuel available,” energy analyst Phil Flynn told TT. “We really didn’t have any big winter demand like you normally have, and there’s more supply.”

Home heating oil and diesel are essentially the same fuel, but home heating oil is dyed red to indicate it is not legal for on-the-road usage.

There’s another reason why energy supplies are abundant. It’s the combination of the timing of the Chinese New Year, which typically shuts down factories and thousands of businesses in Asia, and concern over the coronavirus, which is causing some cities in China to impose quarantines.

Those factors mean fewer ships are on the oceans and, if the virus spreads, Flynn believes it could significantly reduce worldwide economic activity.

“Right now, you’ve got almost 50 million people under quarantine, and what if it spreads? What if it’s 100 million? We don’t know,” he said. “How many airports are going to be shut down? How many planes, flights have been canceled? What about the trains and factories that close?”

Robust U.S. refining capacity is another positive factor that may keep prices in check. According to the Institute for Energy Research, U.S. daily crude production has increased from 7.5 million barrels in 2013-14 to more than 12 million barrels today, primarily due to hydraulic fracturing and horizontal drilling.

Also, the American Petroleum Institute said U.S. refining capacity has increased by nearly 7% since 2010, while throughput — the amount of petroleum passing through refineries — has increased 11.7% in the past nine years.

Many shippers said they planned to use a fuel called marine gasoil, which is a blended version of diesel and bunker fuel that meets the new IMO pollution requirements.

Tom Kloza, co-founder and global head of energy analysis for Oil Price Information Service

Kloza

“We’re only a few weeks into this. And just as you can’t use diesel in a gasoline engine and gasoline in a diesel engine, there are some concerns about this particular fuel,” Tom Kloza, Oil Price Information Service founder and energy analyst, told TT. “Will it be accommodating for all of the vessels that are out there, across the ocean?”

Meanwhile, the price of diesel is dropping.

The U.S. average retail price of diesel fell 2.7 cents to $3.01 a gallon, the Department of Energy reported Jan. 27.

Trucking’s primary fuel costs 4.5 cents more than it did at this time in 2019, when it was $2.965 a gallon, according to DOE.

Transport Topics Reporter Jim Stinson contributed to this report.

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