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Diesel demand to rise on new IMO regulations

Oil&Gas Materials 30 October 2019 14:16

BAKU, Azerbaijan, Oct. 30

By Leman Zeynalova – Trend:

Key View: In spite of short-term headwinds from widespread growth and trade risks, global diesel prices are set to head higher over the coming quarters, as utilisation of the fuel expands across shipping and industrial activities in emerging markets, Trend reports with reference to Fitch Solutions Macro Research (a unit of Fitch Group).

The introduction of the International Maritime Organization’s (IMO) stricter rules on sulphur emissions from January 1 2020 will drive a significant demand shift away from heavier bunker fuel to diesel-based marine gasoil, requiring adaptations on both the supply and demand sides, the company said it its report.

“Underlying fundamentals in the European dies el market are far from constructive. European diesel demand contracted by 4 percent year-on-year in H119, amid slowing economic growth and souring consumer sentiment towards the fuel. Its large existing fleet of diesel cars continue to be a formidable source of demand,” said Fitch Solutions.

However, trends in both car sales and new car registrations indicate shifting consumer preference for diesel alternatives, on environmental grounds.

Indeed, diesel cars accounted for just 32 percent of newly registered cars in Europe over January-June 2019 , the lowest market share since 2001.

“Our global supply and demand balance forecasts show that the global diesel market will remain in a surplus well into the next decade. An onslaught of refining capacity additions globally will lead a significant surge in supply, with almost 6mn b/d worth of projects in the pipeline to be commissioned over the next five years,” reads the report.

In spite of elevated short-term headwinds, steady gains in emerging market (EM) demand and stronger utilisation for construction and shipping are expected to erode the glut at a faster rate than previously forecast, restoring a small deficit in the market by 2024.

“That said, we do note downs ide risks to our view from global growth headwinds and spreading efforts to phase out fossil fuels in the developing markets (DMs).”

From January 1 2020, sulphur content permitted in shipping fuels sold globally will be restricted to no more than 0.5 percent, from the current 3.5 percent, to cut pollution.

This is expected to drive a demand shift from high sulphur fuel oil (HSFO), to different shipping fuel options, including lower-sulphur fuel oil (LSFO) blends and marine gas oil (MGO), a lower-sulphur, higher-density form of diesel. Compliance to IMO’s new regulations is expected to be high. Most ports have already made it clear that ships running on non-compliant fuels will not be welcomed, while ships found in breach of IMO 2020 rules are expected to face penalties and could face difficulties obtaining insurance.

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