New Regulations Are Causing Oil Bulls to Panic

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Every day, tens of thousands of massive transport ships traverse the high seas, delivering goods – both essential and superfluous – to countries all over the world.

And each day, they collectively burn more than 3 million barrels of highly concentrated, high-sulfur fuel.

That’s the way it’s been for decades. Thus far, nobody’s had reason to complain.

But now, since the world’s become more environmentally conscious, that’s all about to change in a hurry.

In fact, starting next year, the shipping industry will have to comply with new regulations that seek to reduce sulfur emissions significantly.

“It is the biggest change in oil market history,” advised Steve Sawyer, senior analyst at Facts Global Energy, an energy consulting firm.

“It is going to affect crude oil producers, traders, ship owners, refiners, equity investors, insurance companies, logistical businesses, banks… Who’s left? I’m struggling to think of anyone it might not affect. That’s why it is a huge transition.”

Even more shocking is that we’re less than six months away from what could be a massively transformative event.

And it’s all thanks to the International Maritime Organization (IMO), which will require shipping companies to fall in line with their new rules on January 1, 2020.

As it stands, the current limit for sulfur content in shipping fuels sits at 3.5% – a level comfortably above the 2.7%, the average sulfur content found in most common “sludgy” ship fuels.

The new sulfur content limit for 2020 will be 0.5%, or 85% lower than what we have now, marking a historic decrease for the industry.

But the IMO isn’t the only one to blame for the new regulations. The whole conversation about lowering sulfur content in shipping fuels started at the United Nations (UN). In a UN subcommittee meeting more than a decade ago, new shipping rules were kicked around, eventually reaching the IMO in 2016.

Now, three years later, the IMO is reminding (possibly warning) shipping companies and oil producers that the 2020 regulations are indeed coming.

And if they aren’t ready for it, there could be hell to pay – via both ship seizures and oil market instability.

“It is an enormous switch. If you considered shipping alongside all of the oil consuming nations, it would be number four or five on the list — so it is an enormous amount of consumption,” remarked Anthony Gurnee, CEO of Ardmore Shipping, one of the world’s top chemical (refined oil) tanker operators.

“We are going to a fundamentally different type of fuel. It is having a bigger impact actually on the refining industry than it is on shipping.”

And that, the “refining industry”, is really what could end up “rocking the boat” more than anything come January 1st.

Saudi Arabia, for example, relies heavily on high-sulfur crude, and could end up getting skewered when shipping companies are forced to make the switch.

But even though there may be some short-term uncertainty (and volatility), some analysts believe the free market should be able to work out the kinks before 2021.

“I am a firm believer that the market will find a balance,” said Sawyer.

“Let me put it this way, there is a brick wall coming at the end of December which has been built for over two years. I think you can either run into it headfirst and say: ‘that hurts,’ or you can find a way around it.”

For investors, that means getting away from traditional oil-based stocks and ETFs, and instead focusing on equities linked to low-sulfur oil, often referred to as “sweet crude”.

Sweet crude oil producers will be in high demand, and anyone producing it could see a huge spike in share prices. In fact, we’re already starting to see renewed confidence in the Light Sweet Crude Oil Index, as evidenced by a health rise in barrel prices since mid-June.

Yes, it’s been a good Q2 for oil bulls in general, independent of sulfur content classifications.

But once 2020 arrives, that could all change in a hurry – potentially scorching oil-heavy portfolios in the process. As the months go by, we’ll undoubtedly witness more IMO-driven anxiety in the oil markets.

However, until the changes actually go into effect, we won’t know the true short-term implications for high-sulfur refineries and producers. Chances are that investors who make the switch to “sweeter” oils in 2019 may end up being very happy about their decision come January 1st.

Because once the IMO cuts into the Saudis’ bottom-line, the “unsweet” oil markets could suddenly turn very sour.

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