HOUSTON (Reuters) - U.S. sour crude prices this week tumbled to the lowest in a year alongside a drop in high-sulfur fuel oil as marine shippers gear up to meet environmental rules aimed at curbing emissions from ocean-going vessels, traders said.
The International Maritime Organization’s (IMO) mandate for vessels to shift to cleaner burning marine fuels effective Jan. 1 will reduce demand for sour crudes, weakening demand for U.S. Gulf Coast grades such as Mars crude, traders said.
Sour crude grades also have come under pressure as the spread between U.S. crude and global benchmark Brent narrows, denting export demand, and as the United States prepares to release sour crude from its strategic reserve, traders said.
Mars Sour crude, a benchmark for sour U.S. Gulf Coast grades, dropped to a $2.58 per barrel discount to Light Louisiana Sweet (LLS) crude this week, from a $2 premium last month. On Wednesday, Mars traded 60 cents above U.S. crude futures, the lowest since early August 2018.
For a graphic on Mars crude's discount to LLS, go here: here
“It’s bearish for sours in the IMO world,” one trader said, referring to the U.N. agency’s low-sulfur mandate. Refiners are shifting to low-sulfur crudes to produce IMO-compliant fuel oil for shippers, another said.
The sharp drop in high-sulfur fuel oil prices also coincided with Mexican state-owned Pemex’s decision to raise September prices for its Maya sour crude by lifting its K factor to $3.75 a barrel.
High-sulfur fuel oil, which historically has been burned by ocean-going vessels, makes up about 40 percent of the formula used to set heavy Maya crude prices, energy investment bank Tudor, Pickering, Holt & Co said in a note this week.
Earlier this year, U.S. sanctions on Venezuela, a major supplier of heavy crude, and pipeline constraints in Canada had pushed demand for Mars and other sour crudes higher as U.S. refiners scrambled to secure new supplies.
Other factors weighing on Mars include the U.S. government’s offer of 10 million sour barrels from the Strategic Petroleum Reserve between Oct. 1 and Nov. 30, and the coming fall refinery maintenance season, which depresses crude demand, traders said.
Reporting by Collin Eaton in Houston and Devika Krishna Kumar in New York; Editing by Sonya Hepinstall