World oil indexes dropped significantly during the week. It looks like the concerns about a tightening of supply, which dominated markets until two weeks ago, have abated despite the fact that the reasons for them (falling Iranian oil exports, declining oil production in Venezuela, reduced spare capacities etc.) still apply.
MABUX World Bunker Index (consists of a range of prices for 380 HSFO, 180 HSFO and MGO at the main world hubs), also demonstrated firm downward evolution in the peri-od of Oct.18 – Oct.25:
380 HSFO – down from 478.79 to 478.29 USD/MT (-8.07)
180 HSFO – down from 525.93 to 525.93 USD/MT (-4.71)
MGO – down from 737.43 to 737.43 USD/MT (-14.57)
Saudi Arabia said the oil market was in a good place and it would not rule out the possibility that country would produce between 1 and 2 million barrels per day (bpd) more than current levels in future. The statements followed concerns that Saudi Arabia might cut crude supply in retaliation for potential sanctions over the killing of journalist Jamal Khashoggi. On Oct.22 it was confirmed that there was no intention of doing that. Meantime, both world business and political leaders have been distancing themselves from the Kingdom. The United States and other Western nations are in a dilemma about how to respond because of lucrative business ties, including weapons sales to Riyadh.
Saudi Arabia and Russia may go forward and institutionalize the OPEC+ partnership, likely moving to create a Secretariat based in Vienna. It is expected that such kind of deal would allow the participants to regularly coordinate and share information and views about the oil market, supply and demand, and what kind of intervention the alliance needs to make, if any.
At the same time the OPEC+ nations are struggling to fully deliver on the oil production in-crease of 1 million bpd promised in June. Saudi Arabia put the most extra barrels on the market, boosting its production by 524,000 bpd in September compared to May. However, Iran’s production slumped by 376,000 bpd in September from May, Venezuela’s output plunged by 189,000 bpd, and Angola saw its production drop by 17,000 bpd between May and September.
The International Energy Agency (IEA) estimates that the losses in Iran’s oil exports are expected to continue, but it is still hard to believe the Trump administration will manage to cut Iran’s exports to zero. An estimated 20 million barrels are destined to flow from Iran to China over the next few weeks, up from the usual 1 to 3 million barrels each month.
Meanwhile, the United States warned Russia to not even consider helping Iran to evade the U.S. sanctions on Tehran’s oil. It was reported earlier that at an Iran-Russia-Turkey summit in Tehran in September (hosted by Iranian President Hassan Rouhani and attended by Russia’s President Vladimir Putin) Iran and Russia cut a deal, under which Iran would export crude oil to Russia via the Caspian Sea, Russia would refine the oil in its refineries, and then export the products worldwide. In return for the crude oil supplies from Iran, Russia would provide un-specified trade and service benefits to Tehran.
The EU from its part plans to explore some extra functions for the special purpose vehicle (SPV), designed to help European companies to do business with Iran while evading U.S. sanctions. The idea is to work out a long-term plan that will protect European companies in the future from the effect of illegal extraterritorial sanctions.
Although Russia hit a post-Soviet record in its oil production last month, it doesn’t plan to raise output to 12 million bpd by the end of 2018, or in the near term, because, as per message from Moscow, this wouldn’t fit Russia’s economic development plans. In September, Russia’s oil production reached 11.36 million bpd (a record high for the post-Soviet era). Currently, Russia is pumping 150,000 bpd above the October 2016 level, so in total, the country has increased production by 450,000 bpd since May.
Forecasts said U.S. oil production may jump to 14 million bpd by 2020. In its October report the U.S. Energy Information Administration (EIA) said that U.S. crude oil production averaged 11.1 million bpd in September, up slightly from the oil production in August. The EIA expects U.S. crude oil production to average 10.7 million bpd this year, rising from 9.4 million bpd in 2017, and will average 11.8 million bpd in 2019. It is also expected, U.S. production is and will continue to be driven by the shale patch, most notably the Permian, although takeaway capacity constraints are slowing down the growth and widening the differential of WTI to Brent.
Rising U.S. oil production and exports out of the U.S. Gulf Coast prompted exchange operators to launch new contracts priced off Houston. CME Group plans to offer a new WTI Houston Crude Oil futures contract beginning this quarter, with three physical delivery locations on the Enterprise Houston system. Intercontinental Exchange in turn is going to launch a crude oil futures contract of physically delivered Permian WTI, deliverable in Houston, as the city has be-come the pricing center for U.S. oil amid growing production and exports.
The IMF says that China’s GDP growth could slow from 6.6 percent this year to just 6.2 per-cent in 2019, although the risks are skewed to the downside because of the trade war. The Fund said that a worst-case scenario in which the U.S. slaps stiff tariffs on nearly all imports from China would cut off 1.6 percentage points from Chinese growth. As for oil demand, the impact remains unclear. The IEA still thinks that total oil demand in China will rise by 525,000 bpd in 2018, a 4.2 percent increase compared to last year. That will slow to 465,000 bpd in 2019.
The International Maritime Organization has rules on marine fuels set to take effect beginning from January 01, 2020, and they are expected to significantly tighten the market for low-sulfur fuels. There are some signs that the Trump administration is hoping to phase the regulations in over time, although it is not clear how successful they will be. Besides, at the moment the U.S. even has stricter requirements in place along its coastline. Given the fact that the rules take effect just at the year of the U.S. presidential campaign, the Trump administration probably fears a political price from higher fuel costs.
There are still many uncertainties in both demand and supply, with demand that could slow down with trade wars, weak emerging markets and currencies, and possible supply declines from Iran, Libya, Nigeria and Venezuela. We expect bunker prices will stay in a state of a high volatility and will change irregular next week.
All prices stated in USD / Mton
All time high Brent = $147.50 (July 11, 2008)
All time high Light crude (WTI) = $147.27 (July 11, 2008)