Oil Products: Alternatives Contain Price Hikes

Oil product prices continued to rebound in Q313 as a result of upward movement in crude oil prices. However, they have not returned to Q113 levels yet despite all three crude grades - Brent, Dubai and WTI - gravitating towards Q113 averages at the time of writing. This supports our view that a tapering in oil product prices is expected for the following reasons: lower crude oil prices, relatively muted demand and a comfortable supply picture in the downstream sector. Moving forward, growing challenges to oil-based fuels with the growth of gas and natural gas liquids production particularly in the US would also suppress rises in prices of oil-based products. Increasingly stringent emission controls in the shipping sector would see bunker fuel prices in Rotterdam particularly hit.

Methodology

Our refined products forecasts methodology is based on estimating the future spreads between each product - gasoline, gasoil/diesel, naphtha, jet fuel/kerosene, bunker fuel 180 and 380 - and its regional benchmark: WTI for products sold at New York, Brent for Rotterdam and Dubai for Singapore. Therefore, changes in crude prices (and our crude price forecasts) will automatically trigger movements in our forecasts for oil product prices.

Brent, WTI Moves Back Up
Front Month Price Of Brent & WTI, January - Present (US$/bbl)

Oil Products: Alternatives Contain Price Hikes

Oil product prices continued to rebound in Q313 as a result of upward movement in crude oil prices. However, they have not returned to Q113 levels yet despite all three crude grades - Brent, Dubai and WTI - gravitating towards Q113 averages at the time of writing. This supports our view that a tapering in oil product prices is expected for the following reasons: lower crude oil prices, relatively muted demand and a comfortable supply picture in the downstream sector. Moving forward, growing challenges to oil-based fuels with the growth of gas and natural gas liquids production particularly in the US would also suppress rises in prices of oil-based products. Increasingly stringent emission controls in the shipping sector would see bunker fuel prices in Rotterdam particularly hit.

Methodology

Our refined products forecasts methodology is based on estimating the future spreads between each product - gasoline, gasoil/diesel, naphtha, jet fuel/kerosene, bunker fuel 180 and 380 - and its regional benchmark: WTI for products sold at New York, Brent for Rotterdam and Dubai for Singapore. Therefore, changes in crude prices (and our crude price forecasts) will automatically trigger movements in our forecasts for oil product prices.

Our estimates of the spread between crude prices and individual oil products are determined by the following:

  • Supply: This will be affected by changes in regional and global refining capacity.

  • Demand: This is partly a function of our expectations of the trajectory of the global economy. With regard to customers, we have identified four main sectors/users for the respective products: kerosene/jet fuel in the aviation sector, gasoline and diesel for retail users and land freight operators, naphtha in the petrochemicals industry (a gauge for industrial activity) and bunker fuel for the shipping sector. In our outlook for demand we therefore incorporate forecasts and the views of BMI's Shipping, Freight Transport, Autos and Petrochemicals industry analysis, as well as the assumptions and forecasts from BMI's Country Risk analysts, in an effort to incorporate a wide range of industry data.

Crude Price Forecasts

In October we revised our forecast for Brent and WTI for 2013. We no w expect Brent to average US$ 107.60 per barrel ( bbl ) and WTI at US$ 98.40 /bbl. Our forecast for Dubai, which takes into account the estimated spread between Dubai and Brent , is US$ 104.20 /bbl ( see BMI 's Oil Price Outlook , 'Resistance To Remain Strong As Risk Premium Subsides' , October 3 ) .

BMI's Oil Price Forecasts, Average Price (US$/bbl)
2011 2012 2013f 2014f 2015f 2016f 2017f
f = forecast. Source: BMI
Brent 111.05 111.70 107.60 102.80 102.00 101.00 99.00
WTI 95.05 93.30 98.40 101.50 101.00 96.00 94.00
Dubai 106.15 108.88 104.20 101.50 100.50 98.50 96.50

Variance Across Product Markets

Crud e oil prices rebounded particularly towards the end of Q313 as security risks in the Middle East led to supply fears. This is reflected in the increase seen across all products between Q213 and Q313.

Brent, WTI Moves Back Up
Front Month Price Of Brent & WTI, January - Present (US$/bbl)

However, the extent of this increase varied across the different products:

Gasoline: High crude oil prices and the driving season pushed prices up, but the extent of this increase is less than that seen in crude prices. Going into 2014, gasoline prices fell despite a slight increase in Brent and Dubai in the European and Singaporean market. In New York, gasoline prices fell more than proportionately to the drop in WTI. From a high of about US$122.71 per barrel (bbl) on average across all three markets, the price of gasoline has fallen to about US$112.62/bbl at the time of writing. This suggests that there could be excess supply to demand in the gasoline market.

Slow Gasoline Move
% Quarter-On-Quarter (Q-o-Q) Change In Gasoline And Crude Prices

Diesel/Gasoil and Jet Fuel : Prices across all three markets have kept steady at the average price in Q313 of about US$126.13/bbl. Jet fuel prices have also remained at Q313 levels at about US$125.40/bbl. The percentage change in prices across all three quarters has trended closely to the percentage change in crude prices.

Naphtha: Prices at Singapore have rebounded 9.1% at the time of writing from US$93.09/bbl in Q213: this compares with a 7.01% and 7.84% increase in Dubai and Brent over the same period. Data on naphtha prices in Europe beyond July 9 has yet to be updated but have likely softened in Q313 as Platts report that many petrochemical firms in the region had turned to the cheaper propane over the season.

Bunker fuel : Bunker fuel prices continue to be least resistant to changes to crude oil prices. While bunker fuel prices increased from Q213 to present , the extent of this rise was less than that seen in other fuels, supporting our view that a weak shipping sector would cap gains in bunker fuel prices. Growing emphasis on shifting to cleaner fuels has also hit bunker fuel prices, especially in the Rotterdam market owing to more stringent fuel standards in North West Europe. Of the three markets, bunker fuel prices in Rotterdam have been the weakest, exhibiting a downtrend trend at the start of Q413 despite a quarter-on-quarter (q-o-y) increase in crude oil prices.

Weak Bunker Price Movement Endures
Price Of Bunker Fuel 180 (LHC) & Bunker Fuel 380 (RHC), January 2013 - Present (US$/metric tonne)

The relatively mild changes seen in most product prices despite crude oil price fluctuations reinforces our view that oil product prices are likely to even out over 2013 following wild fluctuations. However, there are nuances to the price pattern among all three markets seen at the start of the quarter:

  • Rotterdam: Fall in gasoline, jet fuel and bunker fuel prices;

  • New York: Weakness in all product markets. This is most likely a result of a consumer concerns in face of a political impasse that has brought the operations of the US government down.

  • Singapore: Some strength seen across nearly all product categories.

Narrower US Market Crude-Product Spreads

Weak short-term sentiments surrounding the US' economic outlook, complicat ed by higher domestic crude prices owing to an easing of the Cushing glut, would significantly reduce the bumper refining margins US refiners enjoyed due to their access to discounted crude feedstock in 2012. Going forward, as US refiners have to compete with other producers in a well-supplied global market, we continue to expect the gains in product prices to be capped relativ e to gains in WTI.

However, we note that they would still benefit from larger crude-product spreads than their European and Asian counterparts , which a partial rebound expected in 2016 as a result of an expected short-term glut in crude oil in the US as production temporarily outstrips infrastructure capacity ( see 'WTI Pushed Higher As Upside View Plays Out', July 26).

Falling Over Time
Expected Crude-Product Spread* In New York, Rotterdam & Singapore (US$/bbl)

Weak Demand Persists

Despite the recovery in crude prices, we maintain our outlook for lower prices for oil products as demand is expected to be muted over our forecast period from 2013 to 2017:

  • China worries: We have consistently highlighted in our Commodities team's monthly write-up on Chinese industrial imports that China's refined product imports could follow a downward trend - both a result of slower growth and an increase in domestic refining capacity as China slowly becomes a net oil products exporter, adding supplies to the global market. As the world's second-largest oil consumer, slower Chinese demand would further loosen up the global oil products market. Our Country Risk team reiterates that the loss of momentum in the Chinese machine will also have knock-on effects for other economies.

  • Upward fuel price revisions: Some of the fastest growing oil markets have adjusted fuel prices at the pump in the past quarter in order to correct economic imbalances: China (March), Indonesia (June) and Vietnam (July). Higher prices are likely to see a cutback in oil consumption, and consequently oil product imports in these countries.

  • Other emerging market problems: Fiscal and monetary problems faced by Brazil and Argentina - where subsidies fuelled a boom in oil consumption - could eventually make subsidies unsustainable. This could hit oil product demand from Latin America.

  • Limited upside from US and Japan: Despite rising optimism in both the US and Japanese economies, we expect energy efficiency measures to limit oil demand growth that should accompany economic recovery. Moreover, Japanese oil consumption had been propped up in 2011 and 2012 by a switch to fossil fuels for power generation in the wake of the Fukushima nuclear meltdown. Tokyo is still considering the return of nuclear power, which could in turn reduce the power sector's demand for heavy fuels.

  • Weak consumption growth from Europe: Weakness in the eurozone, together with energy efficiency measures, will limit demand from this large market.

  • Increase in global refining capacity: The impact of this would be especially strong in the Asian market, thereby keeping margins depressed.

  • Beginning of a switch to alternative fuels: Liquefied natural gas (LNG) and biofuels can be expected to play a larger role, particularly in the transport sector as governments move to cap carbon emissions and as supplies of LNG and biofuels begin to grow.

We expect these trends to continue into 2014. Our short-term forecasts for 2013 and 2014 show a year-on-year (y-o-y) decrease in prices across all products. This forms part of our view that an upward price trend that began in 2009 has reversed into a downtrend from 2012. This change is particularly pronounced in the bunker fuels market, for both 180 and 380 fuel grades. Nonetheless, , in the longer term, we expect prices to remain above levels seen in 2010 through to the end of our forecast period in 2017 as a result of high crude prices.

Risks To Outlook

The risks we highlight to our forecasts are:

  • Crude oil prices: Although we have already priced in OPEC support for prices in our crude oil price forecasts, we assume that the OPEC price floor will be set at US$100/bbl. Any larger-than-expected cuts in OPEC output, together with security risks in the Middle East, could support oil product prices.

  • Regional discrepancies in the fall in prices: As such, broad generalisations should be taken with caution.

  • Slower-than-expected downward trend in prices: Falling prices may delay the rise of alternative fuels, including some early movement towards LNG and biofuels in the transport sector and the power sector, which we have already seen in the shipping and air freight industries. This could in turn taper the downward trend in fuel prices.

BMI's Refined Products Forecasts, US$/bbl
2011 2012 2013f 2014f 2015f 2016f 2017f
f = forecast. Source: BMI, Bloomberg
Jet Fuel
Rotterdam 129.18 131.41 126.72 121.92 120.74 119.36 117.36
New York 128.23 130.74 123.40 121.50 119.00 117.60 115.60
Singapore 125.67 126.90 123.13 119.10 116.87 114.54 112.06
Global 127.70 129.68 124.42 120.84 118.87 117.17 115.01
Gasoil/Diesel
Rotterdam 127.49 130.36 125.33 119.65 118.00 116.20 113.44
New York 126.64 130.79 125.77 123.39 120.70 119.64 117.64
Singapore 126.26 128.18 124.47 120.50 118.50 115.50 113.50
Global 126.80 129.78 125.19 121.18 119.07 117.12 114.86
Gasoline
Rotterdam 114.94 121.28 118.13 114.39 113.59 112.59 109.43
New York 119.30 124.79 121.38 119.89 117.55 114.20 112.20
Singapore 119.91 123.47 118.80 115.51 114.51 112.51 109.81
Global 118.05 123.18 119.44 116.60 115.22 113.10 110.48
Naphtha
Rotterdam 106.07 106.75 101.17 98.30 98.85 98.79 97.02
Singapore 102.46 102.87 101.20 100.50 99.50 97.50 95.50
Global 104.26 104.81 101.19 99.40 99.17 98.15 96.26
Bunker Fuel 180
Rotterdam 97.27 101.52 96.40 91.49 89.56 87.31 85.18
New York 101.09 104.67 97.15 95.50 94.40 89.40 86.74
Singapore 100.14 102.46 95.22 92.07 92.01 90.86 89.63
Global 99.50 102.88 96.26 93.02 91.99 89.19 87.18
Bunker Fuel 380
Rotterdam 94.03 97.47 93.80 88.79 85.26 81.31 77.68
New York 97.13 100.32 94.89 92.99 90.49 83.49 79.49
Singapore 98.94 101.08 94.12 90.97 91.11 89.96 88.73
Global 96.70 99.62 94.27 90.92 88.96 84.92 81.97
Bunker Fuel Average
Rotterdam 95.65 99.50 95.10 90.14 87.41 84.31 81.43
New York 99.11 102.50 96.02 94.25 92.45 86.45 83.12
Singapore 99.54 101.77 94.67 91.52 91.56 90.41 89.18
Global 98.10 101.25 95.26 91.97 90.47 87.06 84.57

Supply: Supported By Global Refining Capacity

A slight increase in global refining capacity vis-à-vis demand between 2012 and 2017 will help contain dramatic increases in oil prices. According to our forecasts, based on refinery changes in our downstream database, refining capacity is expected to rise by approximately 10% between 2012 and 2017 - which is two percentage points higher than the growth we project for global oil consumption over the same period. Nonetheless, this expansion alone is insufficient to account for the fall in fuel prices that we expect to see.

A Comfortable Supply-Demand Picture
Global Refining Capacity And Oil Consumption, 2010-2017 ('000b/d)

The geography of expansion is highly uneven. Emerging markets in Asia, the Middle East and Africa are building up their capacity. However, developed economies such as Japan and Europe will see more refinery closures, which will in turn negate some of the loosening of the global fuels market that the former should have brought about.

Emerging Markets

Africa will see the fastest rate of regional refining capacity growth at 30%. However, the most significant growth in absolute volume will come from the Middle East - where Saudi Aramco has at least three large 300,000 barrels per day (b/d) refineries set to come online - and in Asia - where expansions continue apace in China and India, while Indonesia considers at least four large newbuild refinery projects. Meanwhile, Russia's refinery modernisation programme will see its plants continue to serve the market to make up for expected closures in Central Europe. Turkey - the fastest- growing market for oil in Europe - will also see significant refinery expansion s .

Market Growth Spurs Refining Expansion
Refining Capacity Of Emerging Markets, 2010-2017 ('000b/d)

Therefore, most of these markets will be adequately prepared to meet an expected increase in local fuel demand and will have spare capacity for export, especially the Middle East and Russia. Even China, has overtaken the US as the world's largest oil consumer, is on its way to becoming a net fuel exporter owing to a continued increase in its domestic refining capacity. This will loosen some pressure on global supplies and in turn prices.

Developed Markets

Among developed markets, the outlook is brightest for US refiners which are amply supplied by cheaper crude feedstock available in the North American markets, thanks to a production boom in the US and Canada. However, due to fragmentation of the US refined fuels market, where supplies are concentrated in the refining heartlands of the Midwest and Gulf Coast, prices in import-dependent New York (East Coast) are expected to remain elevated and follow international trends. This will create an uneven market with prices that can vary vastly from region to region, reflecting differences in the crude baskets that refiners have access to.

Lower runs and refinery closures in developed markets outside of the US will be the main factor propping up prices despite capacity expansion in emerging markets. At a time of high crude feedstock prices, crude import-dependent refiners in developed Europe and Japan will see their refining margins pressed. Weaker domestic demand also makes them dependent on external markets for support. However, their export competitiveness will be challenged by the smaller scale of their plants relative to newbuild and sophisticated facilities in emerging markets, and cheaper fuel exports coming out from the US. For example, European refiners are increasingly challenged by US competition in their traditional stronghold in West Africa, while cheaper Russian products are displacing local output in the Central European and Mediterranean markets.

Struggling Against The New Challengers
Refining Capacity In Western Europe & Japan, 2010-2017 ('000b/d)

Losses in capacity in these traditional refining markets will limit the scale of global refining expansion, such that the global fuel market will not be oversupplied and prices will not be forced down significantly. Slower demand growth - owing to an expected rise in fuel efficiency, tougher environmental rules, rollback of fuel subsidies and alternatives to oil products - explains the extent to which individual oil product prices will fall.

Naphtha: US Gas Hits Demand

As a key feedstock for the petrochemicals industry - for which final demand is heavily reliant on industrial needs - naphtha is greatly exposed to wider macroeconomic trends. With the exception of the US, we expect tepid growth in key industrialised countries - growth in the eurozone and Japan is projected to average 1.0% and 1.2% respectively between 2013 and 2017. China's growth is also expected to slow from an average of 9.2% between 2008 and 2012 to 6.4% between 2013 and 2017.

Although the US is expected to register 2.4% average growth over the same period, naphtha is not likely to benefit from it. This is largely because much of the petrochemical sector in the US is increasingly switching to gas-based ethane as feedstock for ethylene production instead of naphtha to capitalise on lower gas prices. With fiercer competition from the US, Asian petrochemical giants may be forced to roll back production to maintain their bottom lines, which will further dampen demand for naphtha.

Naphtha Losing Competitiveness Versus Ethane
Spot Price Of Naphtha (Singapore) & Ethane (Mont-Belvieu), US$/bbl
Naphtha Out Of Favour In The US
US Ethylene Steam Cracker Cash Margins By Feedstock Type (US$/metric tonne)

The biggest challenge to naphtha prices in Europe and Asia will be the rise in natural gas liquids production (NGL) especially from the US. Although prices from July 9 are not available at the time of writing, Platts reported that naphtha demand in Europe had suffered in Q313 as refiners looked to crack the cheaper propane over naphtha.

The price competitiveness of propane over naphtha in the past two years is a result of growing US supplies into the global market. As shown by the chart below, US exports of propane have grown almost eightfold between January 2009 and July 2013, particularly from 2012.

US NGL Production Pushes NGL Prices Down
US Monthly Propane Exports, 2008 - July 2013 ('000 bbl)

The use of propane for winter heating should reduce competition for naphtha till the end of 2013, but we highlight that NGLs and an upward trend in US propane exports would continue to put downward pressure on global naphtha demand through our forecast period to 2017.

We forecast an average price of US$101.19/bbl for naphtha in 2013 and US$99.40/bbl in 2014 - a 7.2% fall from 2012. The fall in crude prices, alongside slow growth in key countries, will see naphtha prices fall by 2% between 2013 and 2017. An exacerbation of the eurozone crisis or economic shocks elsewhere pose downside risk to this forecast, though we note that the negative spread between crude benchmark prices and naphtha prices limits the extent to which prices can fall further.

Gasoline And Gasoil/Diesel: Subsidies & Fuel Efficiency Cap Upward Movement

Gasoline and gasoil/diesel - key for the land transport sector - will also be affected by a weaker global economic outlook. Complicating demand for gasoline and gasoil/diesel are green measures; fuel-efficient vehicles and green legislation limiting emissions will further limit growth in consumption of these fuels in developed countries. Oil-based fuels could also see a growing challenge from alternative power sources such as batteries or natural gas - LNG and compressed natural gas (CNG) - as the preferred choice in the transport sector towards the tail-end of our forecast period, both in emerging and developed markets.

For example, Indonesia, the Philippines and Pakistan are pushing their countries towards CNG for transportation, while China has already started a pilot programme to run public buses and taxis on LNG in selected cities. A rollback of fuel subsidies or price controls on fuel - which China, Brazil, Indonesia, Vietnam and Malaysia have enacted under budgetary and monetary pressures - would also slow demand growth significantly in these key growth markets. Together with an anticipated increase in regional refining capacity (and associated output), we expect a move towards convergence in prices at Rotterdam and Singapore as the Asian market loosens.

Meanwhile, in the US, major freight player UPS is deploying more gas-powered trucks in its fleet. This would be backed by a US$50mn investment into LNG-fuelling stations. Other major transport companies could follow suit, given the low price of domestic gas in the US and under a small but growing shift towards green policies. Meanwhile, Volkswagen's Scirocco R-Cup - a car race that will pit cars powered by CNG against each other - could also indicate a growing embrace of gas-powered cars at the household level. The challenge posed by gas to oil-based fuels will likely grow, especially if supported by a further fall in gas prices globally and a corresponding development of gas-fuelling infrastructure to support greater commercial and private use.

Our average global gasoline price for 2013 and 2014 is US$119.44/bbl and US$116.60/bbl respectively, compared to an average of US$123.18/bbl in 2012. The average global gasoil/diesel price for 2013 is forecast at US$125.19/bbl - a 4% y-o-y fall. Over the longer term, we expect gasoline and gasoil/diesel prices to fall about 7-8% between 2013 and 2017.

Demand Pressures And Crude Price Changes Support Downward Trend
Average Price Of Gasoline, 2011-2017 (US$/bbl)

Jet Fuel: Limited Upward Movement

We forecast that jet fuel prices will fall steadily through to 2017, in line with our crude price and other fuel products forecasts. Between 2013 and 2017, prices are forecast to fall by 9 % in Singapore, 7% in Rotterdam and 6% in New York.

No Take-Off Expected
Average Price Of Jet Fuel, 2011-2017 (US$/bbl)

We expect that European, North American and Asian air freight carriers will continue to be squeezed in 2013 and going into 2014, by a challenging global economic picture and the continued growth of Middle Eastern carriers and their new hubs in the Gulf. This will have knock-on effects on jet fuel demand. Indeed, the industry's troubled run continues into 2013 with year-to-date (ytd) figures from IATA to the end of August 2013 showing a global rise in freight tonne-km (FTK) of just 0.7%.

IATA did, however, continue to record an increase in passenger demand going into 2013. At the time of writing, passenger traffic for August 2013 (the most recent data available) saw 6.8% y-o-y growth, marking year-to-date growth of 5.1%. Nonetheless, it warned that a decrease in consumer confidence owing to macroeconomic developments will affect this upward trend.

Given that these are not major increases, we believe that the downward pressure on crude oil prices will continue to have spillover effects on jet fuel prices. Thus, we see little upside risk to our short-term jet fuel price forecasts.

Total Air Freight And Passenger Volumes
Aug 2013 vs. Aug 2012 YTD 2013 vs. YTD 2012
RPK: Revenue-Passenger-Kilometres; FTK: Freight-Tonne-Kilometres. Source: IATA
RPK
(% change y-o-y)
FTK
(% change y-o-y)
RPK
(% chg y-o-y)
FTK
(% chg y-o-y)
International 7.5 3.7 5.2 0.4
Domestic 5.6 3.0 4.8 2.3
Total Market 6.8 3.6 5.1 0.7

Bunker Fuels: Sulphur Control To Hit Rotterdam Hardest

Our global average forecast for bunker fuel (the average of the 180 and 380 grades ' global price s ) has been revised upwards to US$ 95. 26 /bbl for 2013 and US$91.97/bbl ( following a upward revision in our crude oil price forecast ). This marks a 5.9 % and 9.2% decrease fr om the 2012 average of US$101.25 /bbl - the highest average price recorded over the last three years.

Of all the oil products, the downtrend in bunker fuel prices looks the most pronounced. 2012 saw a strong downward trend in bunker fuel prices, reversing a strong price rally that had taken off in 2009. Also, among all oil product bunker fuel had been least resistant to changes in crude oil prices, as demand and supply dynamics in the shipping sector played a bigger role influencing prices.

End Of The Uptrend
Bloomberg Average Weighted Price Of Bunker Fuel 180 & Bunker Fuel 380, 2010-Present (US$/bbl)

Downward pressure on bunker fuel prices is chiefly a result of weakness in the global shipping industry. We have also been highlighting three key risks to shipping, each of which will have a knock-on effect on bunker fuels demand:

  • High risk of global overcapacity: This threat is complicated by an expected increase in new and more fuel-efficient ships - especially container ships. 2013 has seen ships with new mega-vessel capacity, including Maersk Line's Triple E-Type 18,000 twenty-foot equivalent unit (TEU) vessel, the largest ship to date, come online. Importantly, these ships are not just larger, but are also more fuel-efficient than those currently employed around the globe, thereby reducing bunker fuels demand.

  • Overall cleaner shipping industry: These efficiency trends are also part of a broader push for a greener industry by both governments with forward-leaning environmental policies and major ports themselves. Hong Kong and Los Angeles - two of the largest ports in the world - are demanding that container ships utilise cleaner bunker fuels than today's standards.

  • Separate push to increase the utilisation of LNG as a shipping fuel: Several European ports have invested in LNG shipping infrastructure to support this new industry. Singapore has also engaged Lloyd's Register to help develop its port's LNG bunkering capabilities. Det Norske Veritas (DNV), a ship classification bureau, estimates that 19-45% of ships will be powered using LNG by 2030. Meanwhile, Maersk Line wants to test biofuels and NYK Line is trialling a solar power-assisted car carrier. While this remains a long-term prospect that will only kick in towards the end of our forecast period, it will dampen oil-based bunker fuel demand in the long term.

Pressure On Europe

This quarter we have incorporated the effect of environmental policies and regulations in the shipping sector into our forecasts. In North America and northern Europe (comprising the Baltic Sea, North Sea and English Channel), strict sulphur standards on bunker fuel will come into effect in 2015. By 2020, the European Union (EU) will impose a strict 0.1% limit on sulphur content of all vessels entering the EU Emissions Control Area (ECA).

Assuming no relaxation of these policies, the shipping industry will have to meet these requirements either by retrofitting their vessels with scrubbers to reduce emissions, switching to the more expensive marine gasoil or turning to LNG as an alternative fuel. This could squeeze demand for sulphur-heavy bunker fuel further and hit prices particularly in Rotterdam as European shippers are expected to be most hit by new regulations.

This underpins further downward revision in our bunker fuel price forecast for Rotterdam. From a forecast of US$87.46/bbl for 180 and US$79.96/bbl for 380 by 2017, we now expect prices at Rotterdam to come in at US$85.18/bbl for the 180 grade and US$77.68/bbl for the more pollutive 380. In contrast, the slow rate of development in emissions regulations in Asia will support bunker fuel demand and prices in the Singapore market. As such, by 2017, Rotterdam is likely to see the lowest price for bunker fuel while Singapore is expected to see the highest price.

Emissions Control Hit Rotterdam
Average Price Of Bunker Fuel, 2011-2017 (US$/bbl)

Although prices will remain elevated by historical standards, our forecast for a decline in bunker fuel costs should offer shipping companies some short-term relief and take the pressure off their bottom lines in the coming years. As such, we believe that companies will continue to slow steam in an effort to conserve fuel and cut expenditures, as well as embrace the push towards cleaner-burning fuels. All of this is to say that the overall trend for bunker fuels will be that of reduced demand over the medium term.

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