World fuel indexes have demonstrated insignificant irregular changes with no firm trend during the week. Recent rising inventories in the U.S. and the talk that OPEC might be prepared to extend the production cuts beyond the initial expiry date at end-June support an assumption that the global inventory drawdown may not come as early as it was expected.
MABUX World Bunker Index (consists of a range of prices for 380 HSFO, 180 HSFO and MGO at the main world hubs) were steady in the period of Feb.23 – Mar.02:
380 HSFO – up from 306.86 to 308.57 USD/MT (+1,71)
180 HSFO – up from 349.07 to 350.21 USD/MT (+1,14)
MGO – down from 532.64 to 527.86 USD/MT (-4,78)
The main reason for the potential fuel price rally is still the production cuts by the OPEC members and Russia to balance the oversupplied fuel market. OPEC has achieved 86 percent compliance rate on the proposed cuts in January 2017. To support this trend, Saudi Arabia has offered to reduce oil production even more if rival Iran caps its own output this year. The non-OPEC members who had supported the cuts have achieved 60 percent compliance at the moment.
Russia’s oil production in February is expected to be lower than the January output, with cutting more than the 117,000 bpd cut it made last month. Russia also reiterated that it would be sticking to the agreement between OPEC and non-OPEC producers and it would try to speed up the gradual cutting of the 300,000 bpd in order to rebalance the market. At present Russia is playing a major role in the 558,000 bpd total non-OPEC reduction.
However, the global glut seems to be even deeper than it was expected. Last week OPEC suggested that the six-month production cut may need to be extended beyond the June 30 dead-line. An extension of the cuts would certainly help shrink the glut, but the longer the deal wears on, the more likely will be the risk for fabricated statistics. On top of that, some countries like Libya, Nigeria and Iraq are undermining the effectiveness of the deal by building production.
Iraqi crude shipments rose 3 percent in the first half of February even after OPEC’s second-biggest producer agreed to participate in global output cuts. Exports increased to 3.93 million barrels a day in the first 15 days of the month, 122,000 barrels a day more than the average for all of January. Shipments from the southern Iraqi port of Basra grew by 10 percent, while sales by the Kurdish Regional Government in the north of the country were up 13 percent. Meantime, according to OPEC output cut agreement, Iraq pledged to decrease production by 210,000 barrels a day from the 3.91 million it pumped in October.
Besides, even after achieving targeted 1.8 million barrels a day of production cut, the huge stockpiles have not reduced. On the contrary, U.S. crude stocks have risen 39 million barrels this year, to 518 million, since OPEC started cutting production in January. U.S. crude imports fell 14 percent to an average 7.29 million barrels a day for the week ended Feb. 17. Meantime, oil exports surged to a record. The rig count continues to go up too: by five to 602 last week, the highest number since October 2015. As a result domestic production rose to 9 million barrels a day last week.
On the other hand, Goldman Sachs predicted that although crude oil inventories in the U.S. are expected to rise, the global oil market is showing signs of tightness and will continue to see crude stocks draw down. In addition, it expects the higher base demand growth this year – projected at 1.5 million bpd – to fully offset increased production in the U.S. Despite of that, Goldman left unchanged its Brent and WTI price forecasts for this year, seeing the price of Brent rising to US$59.00 and WTI – to US$57.50 per barrel in the second quarter, and then falling to US$57 and US$55 per barrel for the remainder of the year.
At the same time, recent sales of oil held in tankers anchored off Malaysia, Singapore and Indonesia could be interpreted as one of the signs that the production cut led by OPEC is starting to have the desired effect of drawing down bloated inventories. 6.8 million barrels of crude has been taken out of tanker storage from Linggi, off Malaysia’s west coast and an additional 4.1 million barrels and another 1.2 million barrels have been taken out of storage on tankers in Singaporean and Indonesian waters. Although in the short-term the flood of crude from floating storage will add to supplies coming into Asia, in the longer-term, however, clearing oil out of floating inventories like tankers is part of OPEC’s goal to rebalance markets. Besides, market has been benefiting from contango where prices for later delivery are higher than those for immediate dispatch.
As a resume, the OPEC deal has succeeded in already taking roughly 1 million barrels per day off of the market, but the supply/demand balance is still not as tight as OPEC members had hoped it would be at this point. The market is rather steady at the moment and we do not expect any firm trends next week. Bunker prices may continue changing irregular.
* 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)