Reliant Wealth Planning | Louisville, KY

Raymond James Energy Stat of the Week
by J. Marshall Adkins

Energy Stat: IMO 2020 - How Bullish Is it for Refining and Will it Drive Crude Prices Much Higher?
July 23, 2018

We have recently highlighted several bullish short-term oil market drivers that are likely to spur global oil prices higher this year including, 1) the looming impact of Iranian sanctions, 2) production risk in Libya and Venezuela, 3) the OPEC+ group's inability to offset the impact of the first two issues, and 4) our belief that global oil inventories will fall to dangerously low levels this year. In this weeks ''Stat'', however, we will look further out on the oil price curve and highlight a very important longer-term (2020 and beyond) bullish oil price driver that very few investors currently have on their radar screens.

That key emerging oil price driver is the International Maritime Organization's new 2020 low sulfur shipping fuel regulations, which will reduce the amount of heavy, sour oil that can be used by the global shipping industry starting in 2020. While some of you may have even heard about this, most investors are currently thinking ''sure this IMO 2020 could lead to some upheaval in shipping or refining - but how big could the implications be for the broader global energy markets?'' In short, this regulation could be a VERY, VERY big deal for the global oil market since it will likely remove effectively 500,000 bpd to 1.5 million bpd of oil supply starting about 18 months from now! Additionally, it is likely to drive diesel prices (and related crack spreads) higher and move light sweet oil demand and prices higher than the heavier, sour grades of crude. In today's Stat, we 1) define the specifics of the IMO's regulation change, 2) explain the potential responses from the shipping industry, 3) offer our opinion regarding the most likely path going forward for shippers, 4) quantify the current market for bunker fuel and detail the potential uplift to middle distillate demand as well as possible uses for this excess ''bottom of the barrel'' fuel oil, 5) address what this all could mean for total oil demand (and future global oil prices), 6) look at the potential demand response, 7) discuss how this might impact regional crude price differentials, 8) forecast when and how we see the market eventually rebalancing, and finally 9) look at the winners and losers within our energy universe created by this massive upcoming disruption.

This is a summary of a much more detailed commentary. Please contact your financial advisor for the full report.

There is no assurance any of the trends mentioned will continue in the future. Past performance is not indicative of future results. Investing involves risk and investors may incur a profit or a loss. Specific sector investing can be subject to different and greater risks than more diversified investments. Investing in commodities is generally considered speculative because of the significant potential for investment loss. Commodities are volatile investments and should only form a small part of a diversified portfolio. Markets for commodities are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.

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