Oil Quicktake: The Impact of IMO 2020 on WAF Crudes

Although the market is pr icing a more nuanced view for impacted IMO products than a year ago, we forecast that the shift will create an additional demand for 2.3mn b/d of clean products (1mn b/d ultra-low sulphur fuel oil, or ULSFO 0.5%, 1 .3 mn b/d marine gasoil, or MGO) , which will have large pricing implications on both the crude and product side. As refineries are incentivised to produce more diesel, crudes with a large middle distillate cut will benefit , appreciating against benchmark grades . Based on our analysis, Nigerian Forcados crude has a combined distillate yield of 47% (diesel and kerosene), compared to 33% for the average WTI barrel, with a far lower light-end cut. Heavy sweet barrels are the perfect fit for the products demanded in an IMO 2020 world (high yields of diesel and ULSFO blendstock) and are scarce globally (1.3% of l oadings in 2018), with the largest concentration by far in West Africa (~75%) . This will ensure these barrels (such as Angola’s Dalia and Chad’s Doba) price at historic premiums to benchmark grades. Beyond IMO 2020, the structural lightening of the crude slate following the shale revolution is at odds with global demand growth, which is increasingly focussed in the middle of the barrel. Any politically stable producers of heavy sweet, or any crude with a high middle distillate yield stand to benefit in this environment.