07-11-2016

Growing pessimism on possible output cut agreement may push bunker prices further down, expert says

Mabux

World fuel indexes have turned into slight downward evolution during the week. There were still factors weighing on fuel markets, especially doubts that a planned oil output cut by the Organization of the Petroleum Exporting Countries (OPEC) and potentially non-OPEC member Russia will prove sufficient to materially change the global oil balance and deliver a substantial reduction in oil inventories. Talk of cutting output seems to be morphing into talks of a freeze in supply at the moment.

MABUX World Bunker Index (consists of a range of prices for 380 HSFO, 180 HSFO and MGO at the main world hubs) has lost its rising potential and turned into downward movement in the period of Oct.27 – Nov.03:

380 HSFO – down from 267.29 to 251.50 USD/MT (-15,79)
180 HSFO – down from 309.86 to 295.00 USD/MT (-14,86)
MGO – down from 500.64 to 487.79 USD/MT (-12,85)

Fuel indexes were under pressure after the failure of OPEC’s meeting in Vienna where cartel planned to discuss output quotas for members participating in an agreement to cut production. Saudi Arabia and its Gulf OPEC allies are already willing to cut 4 percent from their peak oil output. Iraq, OPEC’s No. 2 producer, said that it would not cut output and should be exempted from any curbs as it needs funds to fight Islamic State. As a result, the talks were ended without a joint commitment to cut production and it was only agreed to meet again in November before a scheduled regular OPEC meeting on Nov. 30.

The chances for OPEC to reach the agreement on oil output cut are still estimated as rather low. Iraq joined Iran, Nigeria and Libya in seeking to be excluded from OPEC’s agreement. Output is also recovering from fields in Nigeria and Libya, two more countries that were exempted from the Algiers deal because violence has wrought havoc in their oil industries.

Nigeria’s petroleum minister estimated on Nov.01 that his country is now pumping in excess of 2 million barrels a day for the first time since the start of the year. Libya’s shipments increased to about 466,000 barrels a day in October, the most since November 2014 (that compared with an average of 233,000 in September and as little as 185,000 in May). Together, two countries have now added about 800,000 barrels a day since September.

Iran has steadily increased production since sanctions were lifted at the start of the year. Tehran has repeated it aims to ramp up its output to around 4 million barrels day. Besides, Algiers, Iraq and Venezuela have criticized OPEC estimates of their production, which are compiled from secondary sources that include independent analysts and news organizations. Taken together, more than a third of OPEC’s production now stands outside the plan. In Algiers, OPEC agreed to reduce its production to a range of between 32.5 and 33 million barrels a day.

Like Iraq, Russia is seeking to ramp up output, not tamp it down. Russia is producing about 10.9 million barrels a day on average this year. The latest draft of Russia’s energy strategy sees a potential increase in annual production from 534.1 million metric tons last year to 555 million tons, or 11.1 million barrels a day, by 2020.

Meantime, one of the key events for global bunker market last week was also a meeting of the International Maritime Organization’s Marine Environment Protection Committee (MEPC) in London. It has agreed to implement the global 0.50% sulphur limit in 2020. All European Member States gave their support to this implementation date on a global scale. Other countries, such as Russia and Mexico, major heavy fuel oil producers, were not in favour of a 2020 implementation date.

An IMO-commissioned study, delivered by CE Delft, had concluded that there would be sufficient compliant fuel availability to meet a 2020 deadline. However, an independently com-missioned report by BIMCO and IPIECA, also considered at MEPC, had been said to run counter to the assumptions of the CE Delft report. After the decision at MEPC on Oct.27 it would seem that while consensus has been achieved on a global cap implementation date, there remains deep-rooted skepticism over the crucial question of fuel availability – the factor which could support bunker indexes in medium-term outlook.

As per U.S. Energy Information Administration, U.S. crude production will fall 800,000 barrels a day this year. That would be the first drop since 2008. U.S. crude production averaged 8.5 million barrels a day in mid October, compared with 9.2 million a day at the end of last year. Shale drillers have shown remarkable tenacity in holding up output in the face of falling prices, and crude at $50 to $60 a barrel would probably spur an increase in their production.

China’s total crude output fell 6.1 percent in the first nine months of the year as the country’s state-run biggest Companies hold back spending to cope with the crash in prices. While output drops, crude imports have surged to all-time highs: the country’s refineries are on track to process a record amount of crude this year and the government takes advantage of the slump in prices to fill emergency stockpiles. China edged past the U.S. last month as the world’s biggest importer and the country has relied on overseas supplies for 65 percent of its needs this year.

India’s oil product demand contracted for the first time in almost two years amid strong monsoon rains. In addition, violent protests in the southern Indian states of Karnataka and Tamil Nadu, over sharing river water disrupted fuel supplies. The International Energy Agency expects India to overtake Japan this year as the world’s third-biggest consumer and be the fastest-growing crude consumer through 2040. In August, India’s oil product demand rose 11.4 percent year-on-year, the fastest pace since March.

We expect bunker prices may continue downward trend next week amid growing pessimism and speculations on possible output cut agreement. The volatility on the market will remain.

51_Table1

* 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)

468_Table2

Source: Marine Bunker Exchange

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