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How badly will Singapore be hurt by the new shipping regulations?

Falling demand could be looming.

According to BMI, stricter environmental regulations on the shipping sector will see Singapore's consumption of middle-distillates increase over the next decade at the expense of heavy fuel oil.

They expect residual fuel oil to retain its dominant share of refined fuels consumption in Singapore up to 2024 due to the country's position as one of the world's busiest ports. However, new shipping regulations will see a slight shift in consumption away from heavy fuel oil towards middle-distillates over the next decade.

Here's more from BMI:

Singapore's strategic location along the main maritime trade routes has made it the port of call for a large number of ships. While domestic demand for oil products such as gasoline and diesel is small due to the country's small population, demand for residual fuel oil is large given that it is required to refuel the ships calling on Singapore's port. Fuel oil accounted for about 70.0% of total refined fuels consumption of 1.3mn barrels per day in 2014.

While we expect fuel oil to remain the dominant fuel in Singapore's consumption mix over our forecast period to 2024, increasingly stricter standards for bunker fuels will see a slight shift in the maritime industry's demand away from heavy fuel oil toward marine gasoil, which is a middle-distillate.

At present, bunker demand in Singapore remains skewed towards heavier grades of intermediate fuel oil (IFO), which is classified as residual fuel oil in our consumption forecasts. According to data published by the Maritime Port Authority, IFO380 sales for the first seven months of 2015 were roughly 19.0mn tonnes (127.3mn barrels), accounting for about 74.8% of total bunker sales in the period. This was followed by the sales of 4.9mn tonnes (32.8mn barrels) of the heavier IFO500.

However, the introduction of the Emissions Control Area (ECA) in North West Europe and North America, effective from January 1 2015, means that many of the ships refuelling at Singapore and bound for these Western markets will have to refuel with sulphur-free marine gas oil (MGO), a middle-distillate. While major Asian ports have not adopted the stringent standards of the ECA, a universal regulation for cleaner fuels by 2020 and possible tightening of fuel requirements at major ports such as Hong Kong and even Singapore will see falling demand for heavier IFOs. As such, we expect the share of heavy fuel oil in Singapore's consumption mix to fall over the next decade on the back of stricter environmental regulations on the marine sector.

Over the next 10 years, we forecast the middle-distillates to increase their share of domestic consumption slightly from 6.0% in 2014 to 8.0% by 2024 as demand for distillate fuel oil grows faster than residual fuel oil in light of the evolving regulatory landscape.

We highlight that while rising consumption from the maritime sector would be a positive for distillate fuel oil demand, overall consumption of middle-distillates will be partially negated by a slowdown in Singapore's construction sector in the next few years. Therefore, this will see the share of distillate fuel oil in total oil consumption increase only modestly over our forecast period.

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