US sanctions on China's Cosco hits supply of IMO-compliant low sulphur marine fuel
HIGHLY sought after types of oil best suited to meeting the International Maritime Organization's mandate that caps the sulphur content of marine fuel at 0
HIGHLY sought after types of oil best suited to meeting the International Maritime Organization's mandate that caps the sulphur content of marine fuel at 0.5 per cent are now becoming harder to sell to markets in East Asia, in the wake of US sanctions on a Chinese shipping fleet.
With IMO 2020 coming into effect on January 1, certain rare types of West African oil have surged in value but have had to be marked down owing to the higher transport costs, reported Reuters.
The United States imposed sanctions on units of China's Cosco on September 25 for allegedly ferrying crude out of Iran, putting its massive fleet of oil supertankers off-limits for international companies and sending freight rates soaring.
The high prices are being shouldered by buyers especially in East Asia, several traders said, and are making the purchase of oil from key far-away export regions like West Africa less appealing just when production of the new fuels should be on the rise.
'West African (oil) grades are commanding such a high premium as they are requisite feedstock for low sulphur fuel oil (LSFO) barrels,' said oil broker Matt Stanley at StarFuels in Dubai.
'With the advent of IMO 2020 it is now time for these previously less fashionable grades to shine and for others to become weaker,' he added.
Only one per cent of the world's crude oil exports are heavy and sweet varieties, ideal for refining into low sulphur fuel oil (LSFO), with West Africa providing the lion's share.
Price offerings for Angolan Cabinda, Nigerian Forcados and Congolese Djeno hit record highs, but retreated downward again owing to the new costs of shipping it as far as markets in East Asia.
'It just didn't make economic sense,' said one East Asian buyer. 'Demand has been there but with freight suddenly up that high, the prices can't be justified and the cargoes won't sell until they're brought down again.'
Flows to East Asia from the top heavy sweet oil exporters Angola, Chad and Cameroon were already down in September to near their lowest monthly levels in years partly due to the sky-high prices, traders said.
While there is no indication that the ability of refiners to supply the market with compliant fuels has been undercut by the price pain and lower exports, reserves are not vast.
'The issue is that with four to seven million tonnes of LSFO in the greater Singapore area, that is not a huge amount of supply,' said Wood Mackenzie vice president of oil markets Alan Gelder. 'It's probably around the level of several weeks' worth.'