World fuel indexes demonstrated slight downward evolution during the week while meantime gained some support from the news that members of the Organization of Petroleum Exporting Countries favor extending production cuts beyond June to continue efforts to rebalance global oil markets. The initiative would require that the 11 NOPEC nations that were a part of the original deal commit to extended cuts as well. The bloc meets in Vienna on May 25th, but negotiations to determine whether the deal will be extended (and if so, to what extent) are already underway.
Meantime, consumer countries have built up large stockpiles of crude during nearly three years of low prices, and U.S. shale production is rebounding as prices have recovered recently. That means the process of balancing the market may take at least until the second half of this year.
MABUX World Bunker Index (consists of a range of prices for 380 HSFO, 180 HSFO and MGO at the main world hubs) has slightly declined in the period of Mar.16 – Mar.23 following general trend on global fuel market:
380 HSFO – down from 284.86 to 278.50 USD/MT (-6,36)
180 HSFO – down from 328.07 to 322.86 USD/MT (-5,21)
MGO – down from 510.50 to 506.79 USD/MT (-3,71)
According to IEA data, total OECD oil stock levels confirm the legacy of higher production at the end of last year. Global inventories had started falling in August from record high levels, and by end-December they had dropped by 120 million barrels, an average decline of almost 800,000 bpd. According to IEA, in the U.S., supply is currently building in three ways: imports are rising (and so are exports), domestic output is growing, and refinery utilization is dropping. At the same time, the demand growth outlook for 2017 remains unchanged at a healthy 1.4 million bpd.
OPEC and its allies improved their collective compliance with a supply-cuts agreement last month as deeper reductions from members of the group offset weaker implementation from other producers. As per present statistics, cartel implemented 94 percent of their pledged 1.8 million barrels a day of supply cuts in February, up from 86 percent the previous month. The compliance rate of non-OPEC nations, which includes Russia and Kazakhstan, was 64 percent, compared with the 66 percent that the committee saw last month. However, the inability to balance the market in the first half of the year will increase the chances that the leading oil producers should extend the six-month deal, which took effect on Jan. 1, for the rest of the year.
In this situation Saudi Arabia has sent mixed signals over what it wants and expects: from voicing frustration with non-complying the supply agreement and warning the shale industry up to expressing optimism about compliance and sending soothing signals to the market regarding an extension.
It is expected that Russia may cut its oil output by 300,000 barrels per day by the end of April and so maintain production at that level until the global oil cuts deal expires at the end of June. By the middle of March Russia had cut output by 160,000 bpd, and would reach 200,000 bpd by the end of the month. The Russian company Rosneft, on the other hand, has already expressed doubt that the cuts will last past the six month mark, as was originally intended. It has indicated that a real balance in the market will require action by both: consumers and regulators (not just producers), while there are still some doubts that cut production agreement may bring back high prices, at least for the time being.
On the bearish side, Libya’s major oil ports of Es Sider and Ras Lanuf are resuming operations and preparing to export crude after a two-week halt in shipments due to military clashes. Libya’s total production rose to 700,000 barrels a day from 621,000 barrels on Mar.19 mostly due to an increase from Waha Oil Co. which feeds into Es Sider terminal. Exports are set to restart on March 26 with a tanker which will take 1 million barrels Libyan extra production may add some pressure on fuel indexes.
Iraq also plans to increase output to 5 million barrels a day by the end of 2017. Iraq’s March oil exports have averaged 3.25 million barrels-per-day in the first 14 days of the month, slightly lower than February’s 3.27 million bpd. But the decline was not as much as expected, which could raise doubts over the country’s compliance with the OPEC supply cut deal.
One of the key components of last year’s OPEC production deal was the reservation that Iran could continue increasing production by several hundred thousand bpd, until it had reached its 2012 level of output. At present Iran is pumping 3.8 million bpd, its highest level of production since October 2008. On March 14 it was announced that Iran would cap production at the same level (3.8 million bpd) in the second half of 2017, as long as the OPEC production deal held. That’s a bit of a change in country’s position: last fall it was demanded that Iran would produce as much as 4.4 million, its production level in 2011.
Nigeria may lose its exemption status if OPEC decides to extend its production cuts for another six months. Violence could continue to dissipate, allowing Nigerian output to rise further in the coming months. That would mean that Nigeria no longer has a rationale to be excluded from the caps on output.
At the same time, fuel prices are still under pressure from rising U.S. drilling. The rig count increased by 14 to 631 last week. U.S. drillers have added 106 machines to fields this year. The nation’s crude output has climbed to 9.1 million barrels a day, the most since February last year. IEA predicts shale oil production could rise more than expected if oil hits $70 to $80 a barrel. Growing U.S. production is playing into concerns about the effectiveness of cut output deal.
Asia has been the driver of global oil demand growth, but it is still unclear if Asian demand can help draw down the global oversupply.
The positive sign for the market is that the oil imports statistics of China, India and Japan in recent months suggest that they are increasing the pace of their crude imports. Last month, China’s crude oil imports reached their second-highest level ever (8.286 million bpd), as buys of foreign crude were prompted by strong demand from the independent Chinese refiners. India’s oil consumption growth reached a record-level 11 percent in 2016 as a growing urban population with rising income fueled greater use of cars, trucks, and motorbikes. The Japanese crude oil imports in December reached their highest level since March 2015, and held steady in January.
So, there is still rather high state of uncertainty on global fuel market: OPEC efforts to cut the supply are being compensated by rising U.S. drilling activity. And the extension dilemma looks to be a tough one: OPEC can either agree to extend the cuts and risk losing more market share, or start raising production from July 1, bringing prices further down. We expect bunker prices to continue irregular changes or even to turn into further downward 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 ExchangePrevious Next