From the window of a jet plane, it can be hard to see ships crawling across the seas. Yet what’s burning in those engines thousands of feet below may determine the fate of airline profits in the next few years.Recently:
In about 18 months’ time, the world’s oil refineries are going to have to supply shipping companies with better-quality fuel to comply with international regulations agreed back in 2016 in a nondescript building on the banks of the River Thames in London.
While the regulators’ target was to lower sulfur emissions from ship fuel, it’s becoming increasingly clear there will be an accompanying — and significant — impact on the supply of jet fuel, the aviation industry’s single biggest expense. The trouble is, there’s profound disagreement about whether the result will be a glut or a shortage of the fuel.
“These rules are going to impact airlines,” said Mark Maclean, managing director at Commodities Trading Corporation Ltd., which advises on hedging strategies. “The impacts will not be isolated only within the shipping industry, these changes will affect the entire oil and middle-distillate complex,” the part of refining that includes jet fuel and diesel.
From Jan. 1, 2020, the world’s ships will need to consume fuels containing less sulfur under the 2016 rules set out by the International Maritime Organization, part of the United Nations.
Oil refineries are likely to face an initial demand surge from shippers for diesel-type products when the rules kick in. Diesel is critical in determining the cost of normally more-expensive jet fuel, so if that historic price relationship holds, then the aviation industry’s fuel bill could surge as well.
Refining Puzzle
How it plays out in practice hinges on the way refineries make jet fuel and — critically — how much flexibility they’ll have to adjust their output once the new rules enter into force.
Jet fuel is made in one simple refining process, meaning that if more crude gets distilled to make diesel, then there will be an unavoidable surge in jet fuel supplies too. Several traders say that could result in a surplus.
But not everybody agrees. For one thing, increased amounts of jet fuel will be blended into fuel oil to meet the more stringent sulfur specifications, according to Jan-Jacob Verschoor, a director at Oil Analytics and a chemical engineer by training who previously worked at Royal Dutch Shell Plc. Refineries will also have some flexibility to maximize diesel production to the detriment of jet fuel output, more than negating any ramp-up in overall crude processing, he said....MORE
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Shipping: CEO of Third Largest Fleet Says "We're All Going to Go Bust"
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Shipping: The New Low Sulpher Rules Will Have A Huge Impact On the Oil Business (shipping and world economy too)
