19-12-2016

MABUX: Optimism may support bunker market in the medium term

Mabux

World fuel indexes continued steady upward trend during the week. The deal reached over the weekend in Vienna to secure supply cuts from 11 non-OPEC producers including Russia means the agreement encompasses countries that produce about 60 percent of the world’s crude.

It looks like tactics are changing. Earlier this year, top producers were fighting to maintain its market share—OPEC and non-OPEC alike. Now, the priority of maintaining market share has yielded to the priority of lifting prices and compensating budget losses. There is a chance that this tactic will work, but may take more than six months, as some are cutting, but others are building, including the U.S., Nigeria, Libya, and it’s also uncertain that all parties to these deals will keep their word.

MABUX World Bunker Index (consists of a range of prices for 380 HSFO, 180 HSFO and MGO at the main world hubs) followed general upward trend of oil indexes and rose in the period of period of Dec.08 – Dec.15:

380 HSFO – up from 297.14 to 306.36 USD/MT (+9,22)
180 HSFO – up from 334.50 to 345.07 USD/MT (+10,57)
MGO – up from 499.50 to 512.14 USD/MT (+12,64)

11 non-OPEC producers have agreed to reduce their crude oil output in a bid to support OPEC’s efforts to prop up prices. The participants included Bahrain, Bolivia, Brunei, Equatorial Guinea, Kazakhstan, Malaysia, Mexico, Oman, Russia, Sudan and South Sudan. So cartel together with the rest of the 11 non-OPEC oil producers, including Russia with its 300,000-bpd cut pledge, will bring the total cut in global oil production to about 2 percent, or 1.8 million barrels.

Saudi Arabia has said it is ready to go above and beyond its pledge for the OPEC deal and cut production to below 10 million bpd. This statement by Oil Minister Khalid al-Falih also had an immediate effect on prices, suggesting the largest producer in OPEC was determined to bring markets back to balance no matter what it takes.

In a first visible sign that at least some OPEC cuts are underway, Abu Dhabi National Oil Company (ADNOC) has said that it would cut deliveries by 3 to 5 percent for three export grades crude oil supplies. Under the OPEC deal from November 30, UAE pledges to cut 139,000 bpd from a reference production level of 3.013 million bpd. Kuwait is also preparing to implement the cuts: 131,000 bpd from a reference production level of 2.838 million bpd, and Oman, a member of the Gulf Cooperation Council (GCC) but not of OPEC, is expected to notify customers that it plans to cut production by 45,000 bpd.

On the other hand, it looks like U.S. shale producers are ready to start pumping more the moment prices rise. They’ve already started hedging against price risks in 2017 and 2018, which means not just downward pressure on current prices, but also higher likelihood that shale output will rise further.

It is forecast the U.S. shale patch to yield 4.542 million barrels of oil a day in January 2017. This represents a 2,000-barrel-per-day increase on December 2016 and is, more importantly, the first overall monthly increase since April 2015. The active rig count has been rising steadily since June. Last week, the number of active oil rigs was again higher, with 21 new rigs added to the total.

Besides, oil-hauling supertankers are bracing for the worst earnings year since 2013. Because of the location of OPEC’s key producers — Saudi Arabia, Iraq, Iran, the United Arab Emirates and Kuwait — the group’s output cuts will primarily affect Middle Eastern grades of crude. This may actually spur demand for some tankers if Asian buyers purchase more West African crude.

Growth in crude imports by China, the second largest consumer after the U.S., will probably slow by more than 60 percent in 2017. Private refiners that helped boost purchases to record levels are expected to be constrained by tighter licenses and increased scrutiny on their taxes. At the same time, going into next year, due to the slow construction of new capacity and already full tanks in current facilities, there will be limited space for further growth. China stored a total of 31.97 million tons of oil in its strategic petroleum reserve as of early 2016, equivalent to about 234 million barrels. Some of those volumes are under commercial storage facilities. The country built up a total of about 400 million barrels in inventories by mid-2016, compared with a target of 511 million barrels.

All in all, we expect that the optimism generated by successful oil output accord will render necessary support to fuel indexes in the medium term. Bunker prices will demonstrate upward evolution next week.

*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

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