18-04-2017

Expert says geopolitical factors may support global bunker prices

Mabux

World fuel indexes have demonstrated upward trend this week being supported by strong demand and also by political uncertainty following the U.S. missile air strikes on Syria late last week, which brought an element of geopolitical risk back to the fuel markets. The involvement of the U.S. could mark the beginning of a new, wider conflict and it comes just as the fuel markets are showing some signs of tightening. The result was a sudden uptick in oil prices, pushing WTI and Brent to a one-month high.

MABUX World Bunker Index (consists of a range of prices for 380 HSFO, 180 HSFO and MGO at the main world hubs) has risen in the period of Apr.06 – 13 as well:

380 HSFO – up from 298.43 to 306.79 USD/MT (+8.36)
180 HSFO – up from 341.07 to 347.50 USD/MT (+6.43)
MGO – up from 518.07 to 527.14 USD/MT (+9.07)

The U.S. strike on Apr.07 targeted hangars, planes and fuel tanks at one Syrian military airfield. Syria is not a big oil producer: its output dropped to about 35,000 bar-rels a day in 2016, making it the 66th biggest producer (by comparison, the nation pumped an average 400,000 barrels a day of oil between 2008 and 2010).The fuel price spike may be temporary as long as the military action is contained and doesn’t spread into Iraq. At the same time there is a risk of a new round of conflict that sucks in the U.S. and Saudi Arabia on one side and Russia and Iran on the other. A joint command center made up of the forces of Russia, Iran and militias supporting Syrian President Bashar Assad said the U.S. strike on a Syrian air base crossed red lines and it would respond to any new aggression and increase its support for its ally.

It is still not clear that OPEC will extend its production cuts for another six months. Even if it does, OPEC producers are going to return to the market eventual-ly. At some point, Saudi Arabia may stop ceding market share to other exporters, and will fight to reclaim customers.

In Russia, Energy Ministry said it had been in talks with oil companies regarding the need to prolong the six-month deal with OPEC. It was confirmed, that the cuts had stabilized the market and Russia would continue to watch inventory levels, but it’s too early to decide whether the pact should be prolonged. Before is it was also stated that Russia, which pledged to trim output by as much as 300,000 barrels a day by the end of this month, will make a decision on prolonging the curbs after monitoring results in April and May.

Meantime, as per Fitch report on 14 major oil exporting nations in the Middle East, Africa and Europe, Kuwait is in the best position (a balanced government budget this year with oil forecast to average $52.50 a barrel) and Nigeria is worst off, needing an oil price of $139 a barrel to balance its budget. Even after cuts in government subsidies and currency devaluations, 11 of 14 nations won’t have balanced government budgets this year, including Saudi Arabia ($74 forecasted break-even oil price), Russia – $72 and Iraq – $61.

While total global floating storage is ticking lower, it is still holding above 100 mil-lion barrels. Two areas where it gradually drawn down are off Singapore / Malaysia, and in the Persian Gulf.

Iran is now reportedly struggling to maintain exports. The Islamic republic has sold all of its condensate stocks (around 75 million barrels) from floating storage in the past two weeks. It is forecasting that while the republic’s oil and gas condensate export reached 3.05 million barrels per day (bpd) in the 12th month of the last Iranian fiscal year, the export volume for the current fiscal year is expected to be only an average 2.4 million bpd. Besides, because oilfield decline rates are about 400,000 bpd yearly, Iran can’t sustain its recent high levels of output, so around 3.7 million bpd may be the max. This limitation may support fuel indexes in a medium-term out-look.

Iraq in turn has plans to boost its crude oil production by 600,000 bpd to 5 million bpd by the end of this year, regardless of its participation in OPEC’s production cut deal. However, Iraq’s first problem is that as much as 95 percent of its budget revenues come from crude oil. And the second problem is that the country has to contend with is its war with Islamic State, which makes oil revenues even more important. Taking into consideration growing likelihood that the production cut will be extended, Iraq’s output-boosting efforts have the potential of the opposite vector for prices in the second half of the year.

Libya has promised to ramp up production from 700,000 bpd to 1.1 million barrels per day by the end of the summer, likely to be one of the largest sources of new supply in the world after U.S. shale. But ongoing conflict could derail those plans. Libya’s biggest oil field Sharara stopped producing just one week after it reopened, forcing the country to declare force majeure at a key export terminal. Sharara pumped 200,000 barrels a day before it was shut. Clashes among rival armed groups in early March led to the closing of two of the nation’s biggest oil-exporting terminals. The ports have since reopened. The country is currently one of the smallest members of the OPEC.

Higher U.S. exports obviously is a challenge for the global market and a renewed threat to OPEC and their efforts of keeping prices up. U.S. oil exports jumped to a record high in February, rising by 35 percent from a month earlier. China became the biggest buyer of U.S. crude oil surpassing Canada. The U.S. exported 8.08 million barrels of U.S. light crude to China in February, nearly quadrupling its January. That helped boost total monthly U.S. exports to a record 31.2 million barrels. Tanker tracking data show a continuation of the trend: supertankers with the capacity to move 4 million barrels are en route to Chinese ports. A further 7 million barrels are being shipped to Singapore. While benchmark tanker rates fell from around $70,000 a day in December to below $15,000 a day in March, they still cover basic costs.

At the same time, the U.S. is still a net-importer of crude by a large margin. The 1 million bpd export level is dwarfed by the 7 to 8 million bpd that the U.S. imports. So, while the record high level of exports in February is notable, the U.S.’ status as one of the largest importers in the world has not changed in any significant way.

China’s crude imports in March surged to a record: 9.21 million barrels a day were imported last month. Inbound shipments during the first quarter rose 15 percent to almost 8.5 million barrels a day (by comparison, the U.S. imported almost 8 million barrels a day in March and about 8.15 million during the first three months). China’s daily production in the first two months of this year declined 8 percent, and the nation had to import more oil to fill the gap.

We expect geopolitical factors will prevail on global fuel market next week: the U.S. strike group including the USS Carl Vinson is on the way to Korean peninsula, and the situation in Syria is still unclear. So bunker prices may have high volatility next week with a potential to continue upward evolution.

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* 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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Source: Marine Bunker Exchange

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