World fuel indexes did not have any firm trend during the week demonstrating irregular fluctuations. The fuel market is balanced between two drivers: OPEC cuts and rising U.S. inventories and production. There is still a general consensus that the OPEC/non-OPEC agreement helps supply to get in line with demand, although this bullish stance is countered by the ever-increasing inventories in the U.S. and rising rig counts.
MABUX World Bunker Index (consists of a range of prices for 380 HSFO, 180 HSFO and MGO at the main world hubs) continued insignificant and irregular changes in the period of Feb.16 – Feb.23:
380 HSFO – down from 311.29 to 306.86 USD/MT (-4,43)
180 HSFO – down from 352.29 to 349.07 USD/MT (-3,22)
MGO – up from 531.57 to 532.64 USD/MT (+1,07)
Inventories and supplies remain high, especially in the United States. In Asia, oil flows into the region remain as high as they were before the production cuts as exporters fight for market share. And there are also signs of faltering demand growth in core markets, China and India. In India, fuel demand growth fell in January, while in China sagging car sales and soaring gasoline and diesel exports also point to a slowdown in growth.
Rising inventories backs up the argument that the market is still oversupplied. That stands in sharp contrast with the IEA’s projection that the market will be in a supply deficit on the order of 600,000 bpd in the first six months of 2017, assuming OPEC compliance.
For the first time ever, hedge funds hold more than a billion barrels of bets that crude oil prices will rally. Money managers last week extended their faith in OPEC-led supply cuts, increasing outright long positions in Brent and West Texas Intermediate to a fresh record.
OPEC for its turn is preparing to extend the production cut deal beyond the June expiration date if global inventories fail to fall sufficiently. The comments were initially taken as a bullish sign with fuel prices jumping on the news. But then fuel indexes quickly gave up their gains. An extension of the cuts as such would certainly help accelerate the adjustment by keeping some 1 million barrels per day of supply off of the market for longer. But still it seems that the OPEC deal might not be enough to push oil prices up any higher. And as a result, it is quite possible that the cartel’s goal was not to push the oil price up to $65-70 but to protect the oil price on the downside.
On the other part, OPEC’s cuts are probably less impressive than they might seem. Libyan output has climbed above 700,000 bpd and rising. And by March 2018 it forecasts that the output could reach 1.7 mb/d. These are only projections so far, but if Libya is successful it will add as much new supply as all of OPEC is currently cutting.
Nigeria also threatens to sabotage the OPEC deal if it restores around 0.5 mb/d of disrupted supply. Iran was allowed to increase production slightly, and Iraq, the other major producer in OPEC, is falling short of its pledged cuts. As for non-OPEC countries, Russia has only lowered output by 100,000 bpd compared to its promise of a 300,000 bpd reduction.
Besides, although OPEC has made a strong start in complying with the cuts, rising U.S. stocks and a revival of U.S. oil output have limited the price rise. The weekly inventory reports coming from the U.S. are being increasingly criticized by industry observers for not reflecting the true picture of supply and demand in the country but still carry weight in market sentiment. U.S. energy companies added oil rigs for a fifth consecutive week, extending a nine-month recovery. The figure rose by 6 to 597, the highest total since October 2015. Drillers have added 72 rigs since 2017 began, the best start in five years.
U.S. oil exports also rise. Since the ban was lifted a little over a year ago, export from the U.S has proceeded slowly, but now is averaging 623,000 bpd so far in 2017 (up 42 percent from the same period a year earlier) and could rise to 900,000 bpd at some point this year. Helping U.S. exporters is the steeper discount between WTI and Brent, making U.S. crude more competitive on the international market.
All in all, while the market with the active participation of OPEC/non OPEC countries continues its adjustment process, the U.S. rising output creates a downside risk to fuel prices in the near-term outlook. We still do not expect any drastic changes on global bunker market next week: prices may continue swinging with no firm trend.
* 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)
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