Sushant Gupta, director – Asia-Pacific Refining at Wood Mackenzie, examines the market dynamics currently shaping global crude trade flows and the impact IMO 2020 will have in the future
Global crude trade flows are expected to change significantly, which will have profound implications for crude oil producers, refiners, traders, shippers and storage players.
Large increases in US crude exports to Europe and Asia will redraw global crude trade flows and offer structural opportunities to traders and logistics players. They will need to align their storage and trading businesses according to the new trade flows and understand the growing export logistics infrastructure in the US and other regions.
Wood Mackenzie summarises key emerging themes from the analysis of complex global crude trade markets in its recently launched Crude Trade Service.
US crude exports go global
The largest change that the global crude market will experience in the next five years is the rise and globalisation of US light crude exports. Wood Mackenzie expects US refiners to increase light crude processing by about 2.1 million b/d from 2018 to 2025 and over 2.5 million b/d of light crude volumes are expected to be exported to Europe and Asia over this period.
Higher crude exports from the US to Europe will go against lower crude runs in Europe. To balance off, Europe will need to significantly cut its non-US crude imports. Some African and Middle Eastern crudes are likely to be displaced out of Europe as they have the flexibility to switch from a saturated European market to Asia’s growth market.
Higher crude exports from the US to Asia are easily accommodated in the 4.2 million b/d of incremental crude imports required by Asia. However, US crudes will need to be appropriately discounted to compete with the more prevalent medium gravity Middle East crudes in Asia and to offset the higher transport costs for the US crudes to Asia.
Crude trade converges towards Asia
Wood Mackenzie forecasts that the world will need to run an additional 4.4 million b/d of crude in the refining system during the period 2018 to 2025 to balance the global refined product markets. Interestingly, Asia will account for about 70% of this additional crude run.
While crude runs in Asia increase, domestic crude production declines by about 1.1 million b/d. As such, the crude imports for Asia will increase by about 4.2 million b/d from 2018 to 2025. No other region needs to import as much incremental crude.
Global crude slate lightens
A major trend that Wood Mackenzie forecasts in future supply growth is that light crude supply rises the fastest, offsetting declines in medium and heavy crude. Almost all of the incremental global crude run is expected to be light crude and condensates. As a result, light crude’s share in the global crude slate will increase by 5% by 2025.
Tightness in heavy crudes leaves Asian refiners scrambling for alternatives
Wood Mackenzie expects limited growth in the heavy crude supply of about 1.3 million b/d from 2018 to 2025. More importantly, this growth will come in only after 2022. Most of the traditional sources of heavy crude such as Venezuela, Ecuador, Colombia, Angola and Mexico will see steep declines in production. The Middle East and Canada will lead future growth in heavy crude supply.
Asia’s heavy crude demand will continue to increase from new residue conversion investments, new heavy crude refineries, and with declines in domestic heavy crude production. As such, Wood Mackenzie expects the global heavy crude market to tighten during the period to 2023.
IMO 2020: a potential disrupter to crude trade?
With the growing light crude surplus and tightening heavy crude market, light-heavy crude differentials are expected to remain narrow. However, the IMO regulation taking effect in 2020 will have an opposing impact.
Because of the IMO regulation, Wood Mackenzie expects a stronger gasoil (S<0.5 wt %) and a weaker high-sulphur fuel oil (HSFO) crack (the price difference to crude), meaning a wider light-heavy differential. The impact of the IMO regulation is expected to outweigh that of the crude supply-demand dynamics, leading to an overall widening of light-heavy crude differentials after 2019.
In addition to a wider light-heavy crude differential, the IMO regulation will also result in a wider sweet-sour crude differential. To benefit from these trends, two groups of refiners are expected to emerge. Complex refiners will shift towards processing more of medium/heavy and sour crudes, while simple refiners will shift towards processing more sweeter crudes.
Refiners with capability to process more heavy and sour crudes will go after them. However, global crude supply is expected to grow in the opposite direction. We expect large global growth in light and sweet crude supply, while heavy crude supply growth is minimal. As such, heavy crude trade will be driven primarily by crude supply-demand dynamics.
However, the IMO regulation will provide a surplus of high-sulphur vacuum residue freed up from the HSFO bunker market that could be processed as feedstock by refiners short of heavy crude, mainly in USGC, China and India. Residue trade and supporting logistics are expected to develop to facilitate processing of this residue in the refining system.
To meet the higher demand of IMO-compliant fuels, a new market will also develop for very low-sulphur fuel oil (VLSFO, S < 0.5 wt %). Wood Mackenzie expects VLSFO prices to be approximately US$200/t higher than HSFO. This should incentivise refiners to produce VLSFO through investments in hydrotreating capacity, segregation of refinery intermediate low-sulphur fuel oil streams, or by processing more low-sulphur (sweet) crudes.
Large growth in the global sweet crude supply will be helpful overall to meet the IMO regulation. It will provide an opportunity for many refiners to increase processing of sweet crudes to produce VLSFO for the bunker market, particularly for those refiners that are not far off from meeting VLSFO sulphur specification.
Considerable uncertainty remains around the IMO implementation plan and its impact on crude trade. This includes degree of compliance to IMO regulation and scrubber penetration rates, how and which refiners re-optimise their crude slate, and whether refiners have the infrastructure or capability to segregate sweet crudes and internal low-sulphur fuel oil streams.
Gupta will be speaking more about the IMO 2020 regulation and the impact it will have on HSFO and LSFO on the morning of the second day of the Tank Storage Asia conference on September 25 & 26. For more information visit www.tankstorageasia.com.