Global refineries are expected to process greater volumes of crude in order to meet rising distillate demand, which would be supportive for oil prices. Low-sulfur fuels are easier to produce with the light, sweet crude from US shale. Less complex foreign refineries will likely need more light, sweet crude to produce compliant fuels, which bodes well for US crude exports. The management of refiner PBF Energy (PBF) estimates Atlantic Basin refiners alone may require an incremental 1 million barrels per day of light crude to comply with IMO 2020. Complex US refineries can run heavy, sour oil to make low-sulfur fuel and will likely not require a change in input. Complex refiners stand to benefit if differentials between light and heavy crudes widen as a result of IMO 2020 and a demand shift favoring light sweet crude over heavy crudes.
How could IMO 2020 benefit US midstream?
While refiners and shippers may be the primary players in the IMO 2020 story, there is also an opportunity for US midstream. As discussed, incremental demand for light, sweet crude from less complex foreign refineries should be supportive of growing US crude exports. Several midstream companies have been developing crude export capacity (read more). For example, Enterprise Products Partners (EPD) is expanding its Houston Ship Channel terminal and has entered long-term agreements with Chevron (CVX), supporting development of EPD’s offshore Sea Port Oil Terminal. As another example, Magellan Midstream Partners (MMP) expects to complete an expansion of its Seabrook crude export terminal joint venture with LBC Tank Terminals in early 2020. Even more midstream companies are involved in bringing crude from the wellhead to the coast for exports. While US crude exports are expected to grow regardless of IMO 2020, the regulation is supportive for light, sweet crude demand.
Opportunities also exist beyond growing US crude exports. PBF Logistics (PBFX) announced an agreement in February with shipping company Maersk to process crude using previously idled assets at a terminal facility in New Jersey to supply IMO 2020 compliant fuel to Maersk. The terminal and idled processing assets were purchased in 2018 with a view to adding marine storage ahead of IMO 2020, but the processing deal with Maersk drives incremental EBITDA that was not originally anticipated. On its 2Q19 call, PBFX indicated that processing would begin in October – two months earlier than originally planned – as preparations begin for compliance.
Midstream companies with marine product terminals may also benefit from IMO 2020. Exports of low-sulfur distillates from the US are likely to increase as shippers seek to secure compliant fuels. Storage levels could also be impacted, though perhaps in a more transitory way. As demand for high-sulfur fuel oil craters, storage of HSFO may increase until volumes can be sold for further refining or perhaps blending. Storage of distillates may increase in anticipation of needing extra inventories for compliance.
Bottom Line
It is still unclear what the exact effects of IMO 2020 will be on the shipping industry as well as the implications for oil and refined product prices. Increased demand for light, sweet crude should be supportive for growing US crude exports, and distillate exports from the US are likely to increase as well. US midstream companies are positioned to take advantage of this increased demand due through their transportation, storage, and export assets.
