#1iea An Analysis of the IMO 2020 Sulphur Limit Christophe Barret, Senior Oil Market Analyst London 23 October 2018#2Contents • "Oil 2018 - Analysis and Forecasts to 2023" scenario (March 2018) New developments in the gasoil market Price impact • Today versus Oil 2018 scenario iea © IEA 2016#3Oil 2018 outlook* • • • Need to understand how fuel oil and diesel demand will be impacted by IMO 2020 in order to project future consumption. Starting point: lack of low sulfur molecules (marine gasoil or fuel oil) in 2020 will be the main constraint. We estimated c. 1 mb/d of diesel (in addition to inland requirements) will be available for marine demand in 2020 from: ➤ Refinery capacity developments Crude availability ➤ Refinery flexibility (yield shifts) iea *"Oil 2018 - Analysis and Forecasts to 2023", March 2018. IEA's annual five-year oil market forecast. © IEA 2016#4Oil 2018 scenario- HSFO Switch to MGO and VLSFO in 2020 OECD and major-non-OECD bunker fuel switch by 2020 kb/d 3 500 3.000 90% 80% 70% 2 500 60% 2 000 50% 1 500 40% 30% 1 000 20% 500 10% 0 0% 2015 2016 2017 2018 2019 2020 2021 2022 2023 2015 2016 2017 2018 2019 2020 2021 2022 2023 Bunker HS FO Marine gasoil Marine VLSFO kb/d 2015 2016 2017 2018 2019 2020 2021 2022 2023 Marine gasoil 773 729 745 756 767 1,736 1,229 905 773 Marine VLSFO 0 0 0 0 0 969 1,496 1,849 2,018 Bunker HS FO 2,883 3,049 3,126 3,180 3,231 1,292 1,292 1,292 1,292 Total 3,656 3,778 3,872 3,937 3,997 3,997 4,017 4,047 4,084 Growth 3.3% 2.5% 1.7% 1.5% 0.0% 0.5% 0.7% 0.9% iea © IEA 2016#5Oil 2018 to Oil 20191) A B C = D + E + F D Comparison vs. 2019 (kb/d) Drop in HSFO demand Additional marine gasoil 2020 2021 2022 2023 1,939 1,939 1,939 1,939 969 462 139 7 New 0.5% Marine fuel 969 1,496 1,849 2,018 HSFO blended in new 0.5% fuel 74 179 250 284 E Gasoil blended in new 0.5% fuel 295 717 999 1,134 F Very low sulfur fuel oil blended in 0.5% fuel 600 600 600 600 B+E A-D Total gasoil needed 1,265 1,179 1,138 1,141 Total HSFO surplus 1,865 1,759 1,689 1,655 = C+ B- A Total bunker 0 19 49 ☐ 86 Based on limited additional availability of low sulfur molecules (~1 mb/d gasoil in 2020) iea © IEA 2016#6Changes in diesel demand - Europe's disaffection mb/d 7.0 6.5 OECD Europe: Gasoil/Diesel Demand • • • • Slowdown in European gasoil demand German share of diesel cars in vehicle sales fell from 41% in 1H17 to 31 % in 1H18. The disaffection towards diesel engine cars is spreading all over Europe. EU economies are slowing 6.0 5.5 5.0 JAN APR Range 13-17 JUL OCT 2017 - 2018 5-year avg · Trade tensions and Brexit mb/d 1.3 Germany: Gasoil/Diesel Demand • Strong deterioration in business 1.2 sentiment in Germany. 1.1 1.0 0.9 0.8 JAN APR Range 13-17 2018 JUL OCT 2017 5-year avg Diesel demand drop has happened faster than anticipated iea © IEA 2016#7Changes in diesel demand - China plateauing? • • Urban air quality improvement is a big issue: ➤ Sales of electric buses are booming. ➤ LNG trucks in Eastern China. Industrial upgrade and development of a service-oriented economy. mb/d China: Gasoil/Diesel Demand 4.0 3.5 . Less rail and heavy vehicle freight for coal and industrial output. 3.0 2.5 2.0 JAN APR Range 13-17 2018 JUL OCT - 2017 5-year avg Environmental policies and structural economic change reducing diesel demand in China iea © IEA 2016#8mb/d US50: Gasoil/Diesel Demand Changes in diesel demand – strength in the US · - ⚫ US diesel demand supported by rising imports of goods and strong growth in industrial production. Shale oil production pipeline bottlenecks increased reliance on trucks/rail to move crude oil. • Diesel demand should slow in 2020: ➤ Pipeline bottlenecks should ease in 2H19. ➤Trade flows likely to slow. ➤ US fiscal expenses likely to slow in 2020. 4.6 4.4 4.2 4.0 3.8 3.6 3.4 JAN - - APR Range 13-17 2018 JUL OCT .2017 ⚫ 5-year avg Diesel demand in the US should slow by 2020 iea © IEA 2016#9Changes in diesel demand - slower trade will impact growth iea World Trade Indicators • World trade has already started to slow. 135 128 . Slower trade directly impacts MGO and 133 126 bunker fuel oil demand. 131 124 · Road diesel deliveries also correlated with 129 122 imports. 127 • IMF scenarios on trade show high risk of economic and trade slowdown. 120 125 123 118 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 RWI/ISL-Container-Throughput-Index (Left) CPB World Trade Monitor (Right) Index 2010 = 100 Mar-18 May-18 Jul-18 Diesel will be particularly impacted by trade disputes © IEA 2016#10Price impact - history or elasticity 180 160 140 120 100 80 60 40 20 0 Jan 2005 May 2005 Sep 2005 Jan 2006 iea May 2006 Sep 2006 Jan 2007 May 2007 Sep 2007 Jan 2008 May 2008 Sep 2008 Jan 2009 Gasoil prices ands cracks in Europe чим May 2009 Sep 2009 Jan 2010 May 2010 Sep 2010 gasoil prices ($/bl) Sep 2013 Jan 2014 May 2014 Sep 2014 Jan 2015 May 2015 Sep 2015 Jan 2016 May 2016 Sep 2016 Jan 2017 May 2017 Sep 2017 Jan 2018 gasoil cracks ($/bl) May 2018 Sep 2018 • With low demand response to prices, diesel prices must significantly increase to cut demand. • In Oil 2018 we assumed bunkers would need 200-250 kb/d of diesel from inland demand to achieve the 1.2 mb/d -1.3 mb/d needed for the . switch. Equivalent to 20% to 30% increase in prices. To switch all remaining HSFO to diesel, prices would have to ~double to balance 1 mb/d additional marine gasoil use. Diesel prices more than doubled in 2008. Lower spike anticipated in Oil 2018 © IEA 2016#11Diesel Cuts (kb/d) Possible Price Impact -200 0.00% 50.00% 100.00% 150.00% 200.00% 0 iea -400 kb/d -600 HSFO to switch 3200 3200 3200 3200 3200 3200 3200 3200 -800 VLSFO 1000 1000 1000 1000 1000 1000 1000 1000 -1,000 Existing fo Is 600 600 600 600 600 600 600 600 -1,200 -1,400 blend for VLSFO 400 400 400 400 400 400 400 400 HSFO in blend 80 80 80 80 80 80 80 80 -1,600 Price increases Gasoil in Blend 320 320 320 320 320 320 320 320 Scrubbers 200 250 300 350 400 450 500 550 With Gasoil demand at 28 Compliance 90% 88% 86% 84% 82% 80% 78% 76% mb/d and Ep at -0.03 MGO needed 2000 1886 1772 1658 1544 1430 1316 1202 Gasoil availability 950 980 1010 1040 1070 1100 1130 1160 Gasoil Deficit -1050 -906 -762 -618 -474 -330 -186 -42 Diesel price increase 125% 108% 91% 74% 56% 39% 22% 5% Price increase needed to rebalance markets depends on scrubbers, compliance and diesel availability © IEA 2016#12Conclusion: differences today vs. Oil 2018 . Higher oil prices, weaker economic outlook – mean lower demand growth & higher supply e.g. US. • Slightly more diesel - VLSFO could be available from refining. • Diesel demand fundamentals have deteriorated. • • Under a scenario similar to that of Oil 2018 (100% HSFO → 30% VLSFO, 30% MGO, 40% HSFO): ➤ Diesel may be less stretched due to lower inland demand growth. ➤ Realistic scenario today may be closer to 30% VLSFO, 40% MGO and 30% HSFO. Given recent market developments, impact on prices will depend on: ➤ Scrubbers installed - some recent acceleration in orders. ➤Logistical constraints Compliance iea © IEA 2016