World fuel indexes have demonstrated rather high volatility during the week while market waited if OPEC talks together with non-OPEC producers in Algeria could result in a crude output freeze. In fact, outcome of the negotiations has rendered some support to fuel prices, while the fuel markets may also have to shift their attention back to the supply and demand fundamentals, which are not reassuring.
MABUX World Bunker Index (consists of a range of prices for 380 HSFO, 180 HSFO and MGO at the main world hubs) has changed irregular in the period of Sep. 22-29 and finally showed some slight increase:
380 HSFO – up from 242.50 to 249.36 USD/MT (+6,86)
180 HSFO – up from 285.29 to 288.93 USD/MT (+3,64)
MGO – up from 472.07 to 478.64 USD/MT (+6,57)
The central event of the week was the meeting of the world’s largest producers in Algeria where they discussed ways to support prices, with nervous trade driving volatility to its highest since a similar meeting to freeze output in April in Doha which failed. As a result, OPEC said it will drop production to 32.5 million barrels a day, nearly 750,000 barrels a day lower from what it pumped in August. But still, Iran and Saudi Arabia face significant barriers as both nations have yet to agree on their respective new production targets. While Tehran wants to set its production target at about 4.2 million barrels per day, Riyadh last week asked its regional rival to freeze its output at 3.6 million barrels per day in return for a production cut. At the moment the two countries have started looking to close a gap of 600,000 barrels a day between their respective positions. But it may still take quite a time for the group to replace the pump-at-will policy adopted in 2014 (OPEC’s 14 members pumped 33.7 million barrels of crude a day last month).
There are still some chances that this week’s discussions could finally create the background for an agreement between OPEC and non-OPEC members. Besides, if more Libyan and Nigerian production come online and Iranian production continues to increase, then by November the surplus could be high enough and prices low enough to encourage OPEC to act further.
Meantime, the fundamentals look not so positive so far. Goldman Sachs said the plan to reduce production to a range of 32.5 million to 33 million barrels a day will likely provide support to prices, at least in the short term. But a bit earlier it revised down its estimate for oil prices for the end of this year, lowering its 4th quarter estimate from $50 to $43 per barrel. The Bank expects a global surplus of 400,000 barrels per day in the fourth quarter versus a 300,000 barrels per day draw previously. The downside risk could be even worse as more oil may come online from Libya and Nigeria.
IEA in turn recently predicted that global oil output will exceed demand until late 2017. IEA this month cut its forecast for consumption growth in 2016 and 2017, citing a marked slow-down in India and China. The agency projected demand growth of 1.3 million barrels a day in 2016, down from 1.6 million a day in 2015. Its prediction slips to 1.2 million a day next year.
U.S. crude stockpiles fell 1.88 million barrels last week contrasts with the 2.5-3.2 million barrel gain forecasts. Refineries cut operating rates by 1.9 percentage point to 90.1 percent of capacity, the lowest level since May.
Saudi Arabia pumped a record 10.69 million barrels a day in August compared with 10.2 million in January. Iran produced 3.62 million barrels a day on average in August, an increase of 820,000 since sanctions were lifted at the start of the year.
Russian oil output rose to a record. Output in September has been about 11.09 million barrels a day, the highest monthly average since the Soviet era, and reached about 11.18 million on Sep.20. Meantime, Russian oil producers have been able to weather the commodities rout as a weaker ruble reduced costs and taxes eased with lower crude prices. That has helped support output at existing projects as new fields come on line.
Libya’s output has climbed to 390,000 barrels a day in September after a halt in fighting between rival armed factions. That’s 50 percent higher than the monthly average for August. Nigeria has revived output to 1.75 million barrels a day following a cease-fire deal with militants in the Niger Delta region. That compares with 1.44 million last month, near the lowest in more than two decades.
Another risky factor could be China’s oil demand, which could slow dramatically if China decides to decrease the pace at which it is filling its strategic petroleum reserve. China does not release the data regarding the specifics of its SPR, but has been taking advantage of cheap crude to build up its strategic stockpile. If OPEC does freeze and tries to bring the price back up, China may choose not to buy oil at a higher price but to use their SPR or start exporting it themselves. The potential reduction in Chinese imports could lead to lower fuel prices again (imports are up 13.5 percent in the first eight months of this year compared to 2015). A few months ago JP Morgan estimated that China’s efforts at filling its SPR were nearing an end, which could lead to a 15 percent drop off in oil imports as soon as September-October.
As a summary: demand is still weak and supply is coming strongly (especially from Middle East countries) while stocks are huge. Meantime, OPEC’s agreement may provide a short-term boost to prices although the level of support would depend at what level output is curbed. We expect bunker prices may turn into slight upward trend next week supported by speculations of OPEC’s agreement. The volatility persists.
* 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 ExchangePrevious Next