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Market Conditions Still Favorable for Independent Refiners

We think Marathon Petroleum and Valero are the most attractive.

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Coming into this year, expectations around the effect of IMO 2020 regulation were high. Given the requirement for the reduction of sulfur in marine fuel to 0.5% from 3.5%, expectations were that shipowners initially would substitute some form of their lower-sulfur distillate fuel or mix for marine bunker oil as opposed to installing scrubbers and continuing to run the lower-quality fuel, driving an increase in distillate demand. Consensus held that the results on market prices would be higher distillate prices, lower high-sulfur fuel oil prices, and wider heavy sour crude differentials as simple refiners avoided those crude types to reduce output of residual fuel oil. So far, however, only one of those predicted outcomes has come to fruition, with HSFO prices falling.

The decline in HSFO prices suggests vessel owners are substituting distillate for bunker fuel oil, but the lack of reaction in ultra-low-sulfur diesel prices suggest global refiners are keeping the market adequately supplied with substitutes. Inventories in the United States and globally, measured by days of supply, remain near the bottom of their five-year range, low but adequate. While global inventory lags by several months, weekly U.S. data has actually shown a buildup in distillate inventories in the past several weeks, implying ample availability.

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Allen Good does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.