Insight from Washington: US refiners worry about White House wild card as IMO 2020 nears

Published 11 March 2019

A strict sulfur limit for marine fuels starting in 2020 and its potential to boost US gasoline and diesel prices may have caught the White House off guard last year, but it’s not taking refiners or members of the shipping industry by surprise.

US refiners say they have been preparing for the International Maritime Organization’s 0.5% sulfur cap for a dozen years by making billions of dollars of investments to their plants. They also think US oil producers are well positioned to meet new global demand for lower-sulfur fuels.

Despite the
industry’s confidence, Gulf Coast refiners are nevertheless skittish about one
major wild card.

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The January 1, 2020
implementation date comes right in the middle of President Donald Trump’s re-election
campaign, and this White House has shown a particular sensitivity to pump
prices and their impact on voters.

Trump has proved
through his Twitter feed that he personally keeps a close eye on oil prices,
even if he sometimes confuses ICE Brent and NYMEX WTI. Additionally, his
administration weighs policy options with an understanding of how they might
move gasoline and crude oil prices.

Click to enlarge

Trump administration
sources told the Wall Street Journal in October that the White House was
considering ways to delay the IMO’s 0.5% sulfur cap beyond the long-scheduled
January 1, 2020, implementation date. The story alone sent the stock market
value of five US refining companies down by a combined $11 billion – hence
their skittishness.

Within weeks of the
story, trade groups for refiners, oil and gas producers, LNG exporters and
steelworkers created the Coalition for American Energy Security to educate
White House officials and members of Congress about IMO 2020 and what US
industries were already doing to prepare.

“As we draw
closer to implementation of IMO 2020, it’s essential that the president and his
administration are fully aware of the job impacts and energy security benefits
of implementing the standards on time,” said Ken Spain, spokesman for the
Coalition for American Energy Security. “The American energy industry is
ready to dominate the global market for these new fuels, and timely
implementation is critical to achieving that objective.”

The International Energy Agency and Energy Information Administration project modest price increases for diesel and jet fuel as a result of the tighter marine sulfur standards, but other analysts see more dramatic impacts coming at the end of the year.

Short-term price spikes?

Either way, the
impending sulfur cap will bring big changes for the shipping, aviation,
refining, oil production and power generation sectors.

Go deeper: Read S&P Global Platts’ special report on the future of fuel oil after IMO 2020

IEA Executive
Director Fatih Birol testified to Congress in February that there was a
“bit of panic” in the oil industry about the impending regulations,
but refiners are adjusting.

“There may be some temporary price spikes for diesel and jet fuel prices, but we think the market will adjust, and we don’t expect those price spikes will be long-lasting and big,” he said. “There will be some adjustment period. But the refineries are today being configured according to the IMO rules, and the US is one of the leaders.”

So if US pump prices or oil benchmarks spike ahead of implementation day, what can the White House do to delay IMO 2020? Not much at all – short of building a majority coalition supporting delay ahead of the IMO’s Marine Environment Protection Committee meeting in May. That looks very unlikely, though, after the panel in October already rejected a proposal for a soft rollout of the standards.

Trump does hold a few
tools that he could use for domestic messaging purposes if prices spike:
releasing fuel from the 1 million barrel Northeast Home Heating Oil Reserve or
ordering an emergency crude oil drawdown from the Strategic Petroleum Reserve.

Citigroup commodities
strategist Eric Lee said that the White House wanting to lower fuel prices
ahead of the November 2020 elections is the most notable policy risk
surrounding implementation of the sulfur specs.

“The headline risk alone could drive a selloff in diesel cracks and thus jet cracks, though we see a low probability of IMO 2020 actually being stymied or pushed back, and thus would expect such market reactions to reverse,” Lee wrote in a note to clients.

Twitter effect

In the year since
Trump first used Twitter to complain about high oil prices, his oil-related
tweets continue to move intraday prices in a big way. Lee’s analysis found an
average 1.5% movement immediately after a tweet, with Trump’s February 25 tweet
driving a 3-4% selloff within five hours.

While Trump’s oil tweets may move the market for a day or two, Lee said the tweets have ultimately had little long-term effect in changing the course of oil prices.

“It is not the
first time a US president has tried to influence OPEC policy, but the speed of
the new information hitting the market, the specific tone of Trump’s tweets,
and the automation of trading orders, is driving more short-term and sharp
reactions to such messaging for oil markets,” Citigroup’s Lee said.

Goldman Sachs sees a
“non-trivial probability” that the 2020 presidential election will
have an influence on IMO implementation.

“There is a risk
on the horizon, but it is not our base case,” Jeff Currie, the bank’s global
head of commodities research, told S&P Global Platts. “We wouldn’t
discount any involvement if prices were to rise significantly.”
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