World oil indexes have been falling during the week. Concerns about demand continue. The trade dispute between the United States and China threatens growth in the world’s two biggest economies and currency weakness is pressuring economies in Asia, including India and Indonesia. On the supply side, oil is ample despite the sanctions against Iran as output from the world’s top three producers – Russia, the United States and Saudi Arabia – is rising.
MABUX World Bunker Index (consists of a range of prices for 380 HSFO, 180 HSFO and MGO at the main world hubs), demonstrated firm downward trend in the period of Nov.01 – Nov.08:
380 HSFO – down from 472.57 to 463.71 USD/MT (-8.86)
180 HSFO – down from 518.71 to 511.79 USD/MT (-6.92)
MGO – down from 719.79 to 709.29 USD/MT (-10.50)
Most of the world’s top oil trading houses expect oil prices to decline next year as slowing global economic growth and rising oil supply is expected to compensate Iranian crude export on the market. According to Vitol, oil markets are not that tight right now and a fair price of oil going into 2019 is probably closer to the $70 or $65 per barrel mark than the $85-$90 area. Vitol has now revised down its oil demand growth forecast for next year to 1.3 million bpd from 1.5 million bpd expected earlier. Trafigura in turn was the most bullish saying it wouldn’t be surprised to see oil hitting $100 per barrel by the end of next year. Gunvor thinks that oil prices will stay at current levels of around $75 a barrel Brent next year because producers are aware of the fact that higher prices would dent demand growth, which could lead to another glut.
Goldman Sachs argues that the loss of supply from Iran, combined with thin spare capacity and resilient oil demand will push prices back up. The investment bank reiterated its forecast for Brent to hit $80 per barrel by the end of the year. As per Bank, oil demand is still growing at a brisk rate globally, and Chinese oil demand continues to surprise to the upside despite the ongoing activity slowdown. Goldman Sachs also argues that Iranian oil exports will still decline from here, despite the likely issuance of waivers by the United States to some importers. That means that prices might be hitting a temporary low provoked by the implementation of U.S. sanctions on November 5, opening up upside potential thereafter.
Iran’s oil exports have fallen sharply since U.S. President Donald Trump said at mid-year he would re-impose sanctions on Tehran, but taking waivers into consideration major buyers are already planning to scale up orders from Iran again. The original aim of the sanctions was to cut Iran’s oil exports as much as possible, to quash its nuclear and ballistic missile programs, and curb its support for militant proxies, particularly in Syria, Yemen and Lebanon. The exemptions, however, granted to Iran’s biggest oil clients – China, India, South Korea, Japan, Italy, Greece, Taiwan and Turkey – which allow them to import at least some oil for another 180 days, could mean the exports start to rise after November. This group of eight buyers takes as much as three-quarters of Iran’s seaborne oil exports.
Meantime, the waivers are temporary, with Washington expecting the countries on the list will gradually reduce their imports of Iranian crude. In addition, the U.S. has asked its partners to reduce trade in other goods, not covered by the sanctions, with Iran to maximize the pressure. China in turn has already claimed that it would continue its trade with Iran and oppose the U.S. sanctions on the Islamic Republic as unilateral and long-arm jurisdiction.
Iran from its part said that besides threats to close off the Strait of Hormuz, there is simply not enough spare capacity in the world to make up for lost Iranian supply, which would mean price spikes that would not be to the liking of Washington or its.
OPEC and the U.S. are together adding enormous volumes of new supply, which together have softened the oil market. In October, OPEC hiked oil production to the highest level since 2016. The higher output, led by Saudi Arabia and the UAE, come just as Iranian oil is going offline. Also, Libya saw a sharp rebound in production, although the country is not part of the OPEC+ production cuts.
The 15 countries in OPEC produced an average 33.31 million barrels per day in October, the highest since December 2016. Russia, which is not part of OPEC but part of the OPEC+ coalition, continues to produce at post-Soviet record highs. Iran lost 100,000 bpd in October, due to buyers cutting back because of U.S. sanctions, but the losses were more modest than many forecasts had expected. The U.S. is also adding supply at an impressive rate. The EIA estimates that the U.S. produced 11.346 million bpd in August, an increase of 416,000 bpd from a month earlier. That level makes the U.S. the largest oil producer in the world.
It was reported a 1-rig decrease for oil and gas in the United States last week, bringing the total number of active oil and gas drilling rigs to 1,067, with the number of active oil rigs decreasing by 1 to reach 874. The oil and gas rig count is now 169 up from this time last year. EIA’s estimates for US production for the week ending November 02 were for an average of 11.6 million bpd, a new record.
Rather than accept proposals designed to ease the shift from 3.5% to 0.5% sulphur in marine fuel from January 1, 2020, the IMO instead tightened compliance on Oct.26 by adopting a ban on the carriage of non-compliant fuels in ships without exhaust scrubbers. Various estimates suggest IMO 2020 will involve a transfer in value of over $1 trillion between 2020-25. On the winning side: refiners, low sulphur crude producers, oil-fired power generators and some industrials; on the losing side, freight carriers, high sulphur crude producers and consumers.
The change in specifications is global. Bunker fuel usage is around 5-6 million bpd, roughly 6-7% of the world oil market. Not only that but 0.5% sulphur fuel oil is a new product. Refiners have to reconfigure their kit to produce it, while ship owners will be running it through engines unused to the new specifications.
All in all, global fuel market is looking for some direction now that Iran sanctions are in place. We expect bunker prices may turn into irregular fluctuations 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)
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