Global refining margins dropped to a five-year low in the final quarter of 2019 and have sunk further since the beginning of 2020. According to WoodMackenzie, one of the key factors driving this trend is the introduction of new specifications capping sulfur content in marine fuel at 0.5% by the International Maritime Organization (IMO).
Refiners had expected the new standards, known as IMO 2020, to improve their margins because of constraints on the capacity for the production of very low sulfur fuel oil (VLSFO). But when IMO 2020 took effect on January 1, VLSFO supplies proved to be ampler than anticipated, Wood Mackenzie said in a note dated February 11.
As a result, demand for alternative IMO 2020-compliant fuels – primarily the middle distillate known as marine gasoil (MGO), which is more readily available than VLSFO but more costly – has also been weak. At the same time, global demand for gasoil has been sluggish due to a combination of mild winter weather in the Northern Hemisphere and the coronavirus outbreak in China.
Under these conditions, said Alan Gelder, Wood Mackenzie’s vice president for refining, chemicals and oil markets, global refining margins are unlikely to recover before the end of the first quarter. In the meantime, he commented, “[it’s] about toughing it out, waiting and hoping for demand – China in particular – to perk up again.”