October 30, 2018 / 4:12 PM / 18 days ago

Lack of price clarity clouds oil market's IMO preparations: Vitol

LONDON (Reuters) - The lack of price clarity for fuels that comply with new global shipping rules to reduce sulfur emissions are complicating preparations before the regulations take effect in 2020, the head of Vitol, the world’s largest independent oil trader, said.

FILE PHOTO - A sign is pictured in front of Vitol Group trading commodities company building in Geneva October 4, 2011. REUTERS/Denis Balibouse

The shipping industry faces one of the biggest changes in decades with the new International Maritime Organization (IMO) regulations to reduce the sulfur cap for marine fuels globally from 3.5 percent to 0.5 percent.

“The complication we have at the moment is ascribing a value in, let’s say June 2020, to 0.5 percent [sulfur] product,” Vitol Group chief executive Russell Hardy, speaking at the Reuters Global Commodities Summit, said.

“We know the upper boundary is gasoil, we know where that price is today and we know where the high sulfur fuel oil price is, and the low sulfur fuel oil ... but we don’t know in that range, where the [0.5 pct] product is going to sit.”

He said a derivatives market was missing for the new product, which means traders are unable to take a bet on the value of the new fuel and make strategic investments accordingly.

Traders usually use derivatives markets to hedge any potential of losses on future price swings.

Hardy said he expected oil majors to prepare their refineries to produce more of the cleaner fuels but not the allocation of their inventories.

He said the market would need to move low-sulfur product in the second half of next year from places where it is available like the United States, Brazil and Europe to Asian markets, where most demand will be.

“It’s doable but we would like a bit of transparency,” he added.

The IMO will allow ship owners to continue to burn high sulfur fuels if they have installed sulfur cleaning kits called scrubbers, another investment that needs hedging and price clarity.

“Our latest internal scrubber count is between 3,000-4,000 that will probably be fitted in or about time [2020],” he said.

He said Vitol chose to install scrubbers only on their bigger long-haul ships rather than smaller vessels that carry up to 50,000 tonnes.

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Additional reporting by Shadia Nasralla; editing by Andrew Roche and Jane Merriman

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