World fuel indexes had extremely high volatility on the U.K. referendum’s eve and few days after, followed by a lot of different forecasts, analysis and predictions. Market agreed that prices would react immediately, but the negative effect on oil and fuel following a Brexit outcome would likely not be long lasting. In fact this scenario has now turned into reality.
MABUX World Bunker Index (consists of a range of prices for 380 HSFO, 180 HSFO and MGO at the main world hubs) demonstrated slight upward evolution in the period of June 23 – 30:
380 HSFO – up from 233.50 to 243,57 USD/MT (+10,07)
180 HSFO – up from 274.50 to 283.86 USD/MT (+9,36)
MGO – up from 492.86 до 494.93 USD/MT (+2,07)
The U.K. voted to quit the EU following more than four decades of membership and the question now is how lasting the negative effects of the Brexit result will be for fuel indexes. This is clear that there has been no change to the physical oil and fuel market: although the UK ranks as a top five global economy, a Brexit won’t materially affect the supply/demand balance. But the Brexit is much more significant for the financial and currency markets than it is for oil supply and demand. And these effects can be just as important for price movements of fuel prices.
First days after the referendum clearly demonstrated that the uncertainty on fuel market followed turmoil in financial markets as the pound extended its record selloff while demand for haven assets boosted gold and the dollar. A stronger dollar curbs investor demand for dollar-denominated commodities. It seems that the dollar is a key at the moment, even though it doesn’t have a lot to do with supply and demand.
Another concern is that, with Britain choosing to leave the EU, that other countries could follow suit: further political fallout in the form of a potential second Scottish independence referendum, calls for Irish reunification and the emboldening of far-right parties in the rest of the EU – and that could be a negative scenario for oil and fuel demand in the longer term.
EU leaders gathered on June 28 in Brussels for a two-day European Council summit to discuss Britain’s withdrawal from the bloc. As a resume leaders said there could be no turning back for the U.K. and expressed a growing frustration across Europe that the June 23 referendum has left a power vacuum in the U.K. and the whole EU in a state of limbo. But even as the Brexit vote raises the prospect of a slowdown in the U.K. economy that could spread to other parts of the world, the fuel market itself is seen moving toward a demand and supply balance.
Talking about other potential drivers. Strike in Norway threatened to cut output in western Europe’s biggest producer. About 755 Norwegian workers on 7 oil and gas fields could go on strike from Jul.02. A final round of talks will be hosted by a state mediator on June 30 and July 1 in an effort to avoid disruption that could start the following day. Norway produces 1.5 million barrels per day.
Recent strikes in France took as much as 900,000 bpd offline at one point in June. The result is that crude inventories in an area of ARA (Amsterdam, Rotterdam and Antwerp) rose by more than 3.5 million barrels to 65.635 million barrels in the week ended June 17, pushing prices down. 84 of the ARA hub’s 153 crude storage tanks at independent sites are now more than 75 percent full, while 55 are between 15 percent and 75 percent full. That’s the most since 2013 when the supplies occupied 73 percent of available space. Stockpiles of oil in all of the Netherlands and Belgium haven’t exceeded 65 million barrels for at least 11 years.
The new and extended Panama Canal was inaugurated on June 26 – the first expansion since 1914. A project took nine years and $5.4 billion dollars to complete. The waterway has been doubled so that it can accept larger ships – such as VLGCs (Very Large Gas Carriers) carrying U.S. LNG exports, but still is unable to accept VLCCs (Very Large Crude Carriers). The expansion is expected to boost shipments to U.S. East Coast ports but not for oil at the moment.
China produced 7.4 percent less domestic crude oil in May compared to a year ago, settling at 16.76 million tonnes. This was due to plans by state-owned oil companies to slash output that is weighed down by languishing oil prices.
Iran believes it can move from producing 3.5 million barrels per day (mb/d) in May to 4.8 mb/d by 2021, but to do that the country needs $70 billion in foreign capital to hit the target. The reality is that capital is probably not going to come in the volume that Iran needs. As per EIA evaluation, the best case production scenario for Iran is 4.1 mb/d by 2021. The slowing production from Iran is already hitting OPEC’s crude production along with outages and issues in other OPEC nations. As a result, OPEC production declined marginally in May and may have done so again for June.
Nigeria is hoping to continue to boost oil output after attacks crippled the country’s production in recent months. By the end of June production had probably climbed from 1.3 million barrels per day (mb/d) to 1.9 mb/d, successfully bringing back a sizable portion of its disrupted output. In July, if pipeline repairs can be completed, Nigeria hopes to reach 2.2 mb/d.
We expect the uncertainty on world bunker market will continue next week and so bunker prices may have daily irregular changes until new signs/data emerge that provide a clearer path forward.
* MGO LS
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)
Source: Marine Bunker Exchange