24-07-2017

No visible drivers on the bunker market so far, expert says

fuel

World fuel indexes have slightly risen during the week. However, global fuel market remains skeptical of OPEC’s and its partners’ ability to restore balance in demand and supply while, U.S. producers continue to ramp up production.

MABUX World Bunker Index (consists of a range of prices for 380 HSFO, 180 HSFO and MGO at the main world hubs) continued slight upward movement in the period of Jul. 13 – Jul.20 as well:

380 HSFO – up from 286.07 to 293.86 USD/MT (+7.79)
180 HSFO – up from 327,14 to 332,79 USD/MT (+5.65)
MGO – up from 478.21 to 492.86 USD/MT (+14.65)

Last week the IEA estimated that OPEC’s compliance rate dipped on the back of rising production from Libya and Nigeria. The conclusion was that the unexpected increase in output will probably delay the oil market rebalancing. But at the same time the agency has made the revision on oil demand. It will expand this year by 1.5 million barrels per day (bpd) (a jump of 0.1 million bpd from the agency’s estimate in the previous month), mostly due to the United States and China, the world’s two biggest oil consumers. It means that demand is rising faster than expected, which suggests the second half the year will probably lead to stronger inventory declines.

Meantime, it seems that OPEC does not have too many options at the moment: to keep going with the cuts as-is, to deepen the cuts, or to give up the cuts and return to maximum production levels. First option will require a lot of investment but may result in no great change in prices. Option two is even worse as deeper cuts will only benefit U.S. shale drillers, and would not benefit OPEC. So the suggestion to pump at maximum again to limit U.S. shale may at some point make the sense. Prices may decrease but the decline may not be as severe as OPEC fears.

Saudi Arabia already boosted output by an estimated 120,000 bpd in June, from a month earlier. That put Saudi production above 10 million bpd for the first time in 2017. Those gains, combined with increase from Libya and from Nigeria put OPEC’s June production 340,000 bpd higher than in May. It also took the cartel’s compliance rate down to just 78 percent from 95 percent in May, the worst monthly figure for the group since its deal came into force at the start of the year.

The production figures from Libya and Nigeria are much higher at the moment than their June average. Over the past few months, the two countries have added 700,000 bpd in new supply, offsetting nearly half of the 1.8 million bpd in the combined OPEC/non-OPEC cuts. The gains continue now: Libya’s output is above 1 million bpd (a four-year high).

Nigerian crude production rose by 96,700 bpd to 1.733 million bpd in June and is very close to its target of 1.8 million bpd. Nigeria last produced these volumes in February 2016 while its production capacity is estimated as 2.2 million bpd.

At the same time some OPEC members consider that it is too early to curb crude oil production in Libya and Nigeria: a possible cap would only hold steady their levels of production, and would still take away from OPEC/NOPEC production quotas that promised to cut production by 1.8 million bpd. Cartel has invited the two producers to the July 24 meeting in St. Petersburg to discuss the stability of their production. If Libya and Nigeria agree to limit production, it would at least remove two major sources of increasing supply from the market.

In addition, Ecuador announced its plans to abandon OPEC’s production cut deal and boost production to shore up its finances. This decision has made OPEC’s position more precarious, as more members might choose to follow Ecuador’s example – a move that could put an end to the deal.

Non-OPEC supply is depressing the fuel market as well. Global oil production is up 1.2 million bpd from a year ago. Next year it is expected that non-OPEC countries (first of all, U.S., Canada and Brazil) will add 1.4 million bpd of new supply, enough to meet the entire growth in global demand. In such a situation any gains in output from OPEC would merely return the market to a surplus.

While U.S. rig count still increasing, it is expanding at a slower rate. Last week the rig count only increased by 2, a rather small number in the context of the 14-month-long expansion since the spring of 2016. In the past three weeks, the oil rig count has only increased by 7 (in the prior three-week period the rig count jumped by 25). Besides, according to Wood Mackenzie, the average oil well breaks even at roughly $43 per barrel. It is expected, that the service costs will continue to climb this year, and the breakeven price could rise to $45 per barrel in the months ahead. The smaller increases in rig count and breakeven levels are giving the hope that the drilling boom could be curbed, which in turn would contribute to a tighter market.

The U.S. has posted three consecutive weeks of strong inventory declines. The EIA reported inventory drawdowns of 7.5, 6.3 and 4.7 million barrels in the past three weeks, respectively. It is still early, but several more weeks of inventory declines may build a firm support to the fuel indexes.

Sentiment was also boosted after China reported upbeat data on exports and imports for June, the latest sign that global growth is picking up a bit, and that’s positive for the fuel prices. The country imported 8.55 million barrels of oil daily during the first half of the year, or 212 million tons in total – a 13.8-percent annual increase. The growth in imports comes on the back of higher refinery runs after a maintenance period, as well as dwindling local crude production. Besides, China has approved a second round of oil import quotas for independent refineries and several state operators that will bring the total import quota amount to 91.73 million tons or 1.83 million barrels per day for the whole of 2017. (the first round of quotas, issued in January, allowed for the import of 68.81 million tons).

There are no visible drivers on the bunker market so far, and the fundamentals continue to look poor. We expect bunker prices may continue slight upward evolution if OPEC succeeds in convincing Libya and Nigeria to limit production output to a certain levels.

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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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