New fuel specifications are set to send shockwaves through oil markets, but a new wave of low-sulphur fuel oil coming online could create a new market-crippling glut.

The refining industry around the world has carefully planned to boost compliant fuel production in the back end of the year, expecting windfall from the IMO-effect in the months immediately preceding the shipping rules change.

But as January 1, 2020, is fast approaching, the previously expected refining margins bonanza could turn to bust as the disruption is now expected to be much less dramatic than previously thought.

According to the new rules by the International Maritime Organization (IMO), only 0.5-percent or lower sulfur fuel oil should be used on ships beginning January 1, 2020, unless said ships have installed the so-called scrubbers – systems that remove sulfur from exhaust gas emitted by bunkers – so they can continue to use high-sulfur fuel oil (HSFO).

To be sure, the new fuel specifications are set to send shockwaves through the entire supply chain in the shipping industry – from crude oil producers, to refiners, to traders, to shippers, to end-consumers of everything traded on ships.

However, supply of compliant low-sulfur fuel could be just as sufficient, while demand may be subdued, due to the global economic and trade growth slowdown and at least some non-compliance from shippers, which analysts at Wood Mackenzie put at around 10 percent for 2020.

Russia is one of the countries set to delay the IMO rules implementation, but only in its territorial waters including rivers, Energy Minister Alexander Novak said, responding to questions sent by Bloomberg. Russia will still comply with the rules in international waters. Due to its predominantly high-sulfur oil, Russia is set to be one of the biggest losers in the new marine fuel rules.

The new regulation will lead to low-sulfur fuel oil (LSFO) displacing HSFO demand, but the change looks less dramatic now than it did several months ago.

The shipping industry consumes 3.5 million bpd of HSFO, while refiners around the world are set to provide 1.5 million bpd of IMO-compliant very-low sulfur fuel oil (VLSFO), according to WoodMac’s Head of Oils Analysis Alan Gelder. There will still be demand for HSFO – from the ships with scrubbers installed, and from some non-compliance, including shippers prepared to cheat in markets with limited controls, and non-compatibility of VLSFO. Around 1 million bpd of marine fuel demand would be for marine gasoil (MGO), a middle distillate similar to diesel, WoodMac reckons.

VLSFO is cheaper than marine gasoil, but some conservative customers could still prefer MGO, Sharon Weintraub, Chief Executive Officer for Supply and Trading, Eastern Hemisphere, at BP, told Reuters in September.

Supply of VLSFO looks to be greater than initially thought, Matt Stanley, an oil broker with StarFuels in Dubai, told Reuters.

With relatively adequate supply of compliant fuel, refiners may not see the refining margins boom they were expecting earlier this year.

As 2020 is drawing nearer, LSFO storage around the world’s key bunkering port, Singapore, is piling up. As at end-October, 7.3-7.5 million tons of LSFO and blendstocks were sitting in floating storage on board 29 supertankers offshore Singapore, up from 7 million tons at the start of October, according to Refinitiv analysts quoted by Reuters.

Japanese refiners are ready to supply LFSO but they will keep up HSFO production and supply because Japan hasn’t banned discharging of water from open-loop scrubbers at ports, according to S&P Global Platts.

Regardless of the marine fuel that the shipping industry will use, demand for each of those could be much lower than expected in view of the global economic slowdown and seaborne trade growth slowdown.

In its September Oil Market Report, the International Energy Agency (IEA) said that the trade slowdown weighs on fuel oil demand and allows for a less disruptive switch to IMO-compliant fuel. In March, the IEA expected gasoil shortage of 200,000-300,000 bpd in 2020.

“With fewer than four months left before the rule kicks in, we believe that the oil market is likely to be better supplied than we thought,” the IEA said in September.

Refining capacity has increased globally, while bunker demand is now lower due to the ongoing contraction in global trade, the agency noted. In addition, US light oil supply has increased, and US grades are in demand with refiners who process them into VLSFO fuels. These recent developments “now point at the likelihood of an even smoother start to the implementation,” the IEA said.