World oil indexes have demonstrated steep decline during the week pressured by concerns over future oil demand amid weakening global economic growth and doubts over the effectiveness of planned production cuts led by the Organization of the Petroleum Exporting Countries (OPEC). Rising crude oil inventories and expected increases in shale production weighed on prices as well.
MABUX World Bunker Index (consists of a range of prices for 380 HSFO, 180 HSFO and MGO at the main world hubs), also continued firm downward evolution in the period of Dec.13 – Dec.20:
380 HSFO – down from 374.50 to 337.14 USD/MT (-37.36)
180 HSFO – down from 423.50 to 384.50 USD/MT (-39.00)
MGO – down from 604.71 to 582.21 USD/MT (-22.50)
The International Energy Agency (IEA) said it’s too early to tell whether oil-supply cuts announced by OPEC and its allies last week will succeed in balancing global markets. As per IEA, even if the OPEC and its partners reduce production as promised, there could be some surplus in 2019. The IEA reduced its forecast for new supplies outside OPEC next year because of a lower outlook for Russia, which is cooperating with OPEC, and Canada, which is separately suppressing output to deplete brimming inventories.
OPEC expects demand for its crude oil to average 31.4 million bpd in 2019, down by 100,000 bpd from last month’s forecast, which suggests that the cartel would need to strictly stick to the new production cuts and rely on continued declines from exempt members Iran and Venezuela if it wants to prevent an oversupply. Non-OPEC oil supply growth for 2019 was revised down by 80,000 bpd to 2.16 million bpd, due to a lower forecast for Canada with Alberta’s mandatory production cut, and a downward supply forecast for the 10 non-OPEC participants in the OPEC+ deal in the first half of 2019.
The U.S. Energy Information Agency (EIA) in turn still expects significant production growth from U.S. shale despite the downturn in prices. The EIA lowered its forecasted 2019 WTI prices by $10 per barrel from its previous report, yet it kept its supply forecast unchanged – it still thinks that U.S. oil production will rise from 10.9 million bpd in 2018 to 12.1 million bpd in 2019, despite the significant downward revision in prices.
In the meantime, most major investment banks were in agreement that the OPEC+ deal should eliminate the supply surplus in the first half of 2019. Yet, oil prices have not jumped as much as many expected. Morgan Stanley expects Brent to reach $67.50 per barrel in the second quarter of 2019, a downward revision by $10 from its prior forecast. The investment bank said that non-OPEC supply growth could still overwhelm demand, which should keep a lid on prices. Citibank in turn forecasts Brent to average just $60 per barrel in 2019, or essentially flat from today’s level.
Russia is planning to reduce its oil production by 50,000 bpd to 60,000 bpd in January as part of the new OPEC+ deal. While Russia will be making the biggest share of the non-OPEC 400,000-bpd cut, it may take months to reach the 228,000-bpd production reduction. The agreement calls for 2.5 percent cuts from the October production levels, which for Russia was a post-Soviet record high of 11.4 million bpd. Russia reaffirmed that the oil production will be reduced, just as two years ago, as quickly as possible in terms of technology. By the end of this year, the RF energy minister will meet with representatives of Russia’s oil companies to discuss the implementation of the cuts.
Despite assurances that Nigeria is working to diversify its economy away from oil, the African OPEC member continues to depend heavily on oil exports, and consequently, on oil prices, for its international trade and export revenues. The value of Nigeria’s crude oil exports in the third quarter accounted for 85.4 percent of the value of all exports. Following a wave of militant violence in 2016 and early 2017, Nigeria’s oil production started to recover in the latter half of 2017, when attacks on oil infrastructure began to subside. Current crude oil production is 1.7 million bpd. Despite some concerns over the stability of Nigeria’s oil operations ahead of the February elections, the country wasn’t exempted this time around from the new OPEC+ production cut deal signed last week.
In an effort to drain the surplus of oil stocks, Saudi Arabia plans on curtailing shipments specifically to the U.S., a strategy intended to shift market psychology. Because the U.S. is one of the few countries that offers regular and transparent data on oil inventories, cutting down on stocks in the U.S. will transform how investors view the global market. Visible declines in inventories, which the EIA will report week after week, should bolster market confidence. It’s a strategy the Saudis used back in 2017 when it tried to boost prices.
The U.S. Senate passed a bill to end American support for the war in Yemen. The Senate also censured Saudi crown prince Mohammed bin Salman and blamed him for the murder of slain journalist Jamal Khashoggi. The bill will have no practical effect since the U.S. House of Representatives declined to move companion legislation earlier this week. But the issue is not over and with Democrats taking over control of the House in the New Year, the legislation could be revived.
The U.S. shale industry is likely satisfied of the successful OPEC+ meeting, which should tighten the market and push up prices. However, the deal probably won’t significantly alter the shale supply picture as there’s a lot of uncertainty and this is a pretty small cut. The duration of the deal is an open question, as is compliance. The outlook for the global economy could loom much larger for shale operators.
U.S. drillers cut four rigs last week, adding to drop of 10 rigs two weeks ago, which were the most in more than two years. Shale firms cut back on drilling activity after oil prices fell by a third over the past two months. Still, that didn’t stop the United States from briefly turning into a net oil exporter for the first time in history earlier this month.
For now, it seems the fuel market is not convinced that the OPEC+ cuts will be sufficient to significantly increase oil prices, despite the initial euphoria surrounding the Vienna agreement. We expect bunker prices may finish the year with downward trend while looking for new sup-porting movers in a near-term outlook.
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)