18-09-2017

Bunker market may continue slight upward trend next week, expert says

World fuel indexes have demonstrated irregular changes with no firm trend during the week. The market was rather nervous assessing the consequences of two most powerful Hurricanes in more than 50 years, although OPEC’s report that its output fell in August supported the fuel prices.

MABUX World Bunker Index (consists of a range of prices for 380 HSFO, 180 HSFO and MGO at the main world hubs) has continued slight upward evolution in the period of Sep.07 – Sep.14:

380 HSFO – up from 319.57 to 324,43 USD/MT (+4.86)
180 HSFO – up from 360,43 to 365,36 USD/MT (+4.93)
MGO – up from 550.57 to 553.71 USD/MT (+3.14)

Recent OPEC report is a clear sign of a sustainable bear market, with the cartel’s oil production falling slightly in August, while its demand forecast for 2017-2018 rose. OPEC produced 32.76 million bpd in August, which is 79,100 bpd less than in July. However, it seems that the August fall was mostly a result of supply disruptions in Africa rather than the outcome of the conscious effort, despite OPEC officials insist that the output cut deal is working and global supply is falling. Even so, the deal might get another extension beyond March 2018. The chance of this happening remains uncertain but the option is opened.

At least two producers, Russia and Saudi Arabia continue discussing the scenario of another extension. Russia is a higher-cost producer than Saudi Arabia, so it will have more trouble if prices fall sharply. On the other hand, Saudi Arabia is more heavily reliant on oil revenues for its budget than Russia.

Meantime, Russia seems to be feeling rather comfortable with current oil prices. Customs data last week showed that revenues from crude oil exports had jumped by 35 percent over the first seven months of the year. RF Energy Ministry said the current price level of Brent, at US$54 a barrel, is optimal, allowing the industry to make investments in new production.

Saudi Arabia in turn is revising its Vision 2030, as it turns out the initial goals set in the program were a bit too ambitious. The Kingdom is also preparing for the listing of Aramco, which could make or break Vision 2030. The program is costly and Saudi Arabia has a budget deficit to deal with besides the long-term diversification.

Present projections see low-cost OPEC producers—Saudi Arabia, Iraq, Kuwait, Qatar, and Iran—losing 9 percentage points from their market share if the artificial support of prices continues until 2022. Russia’s share under this scenario will remain virtually unchanged, and that of the United States and other non-OPEC producers will rise.

Meantime, the two exempted members – Libya and Nigeria – have added large volumes of new supply this year. As per the secondary sources, Nigeria’s crude output stands at about 1.86 million bpd, which comports with OPEC’s latest estimate. It means that Nigeria is now producing about 400,000 bpd more than it was a year ago on the eve of the original OPEC agreement.

Libya too has ramped up output twice as much as a year ago, although production figures have fluctuated lately on pipeline and oilfield outages. It was reported that the largest oil field, Sharara, would resume production following a two-week halt, after a pipeline blockade ended Sep.05. Libya pared output to 890,000 barrels a day in August (still short of pre-2011 levels, 1.6 million bpd).

As a result, Nigeria and Libya together have added between 700,000 and 900,000 bpd of new supply in the past year. OPEC has invited both countries to its upcoming monitoring meeting on September 22. The pressure to put a limit on extra production could rise ahead of the official meeting at the end of November.

Hurricane Irma knocked out power to nearly 7.4 million Florida homes and businesses on Sep.10. As per Goldman report, in the wake of both hurricanes: Harvey and Irma, oil demand is expected to drop by some 900,000 bpd this month. Also, according to estimates, the combined effects of production disruption and demand drop caused by hurricanes will lift global oil inventories by 600,000 bpd in September. For next month, estimates are that the hurricanes will lower oil demand by some 300,000 bpd.

U.S. shale oil production is still the main factor pushing prices down, as the number of rigs increased week on week and production volumes continued to show a slight upward trend. However, politics, security and technology began to constrain further production increases. Since January 2017, the average production volume per well has seen a severe decline. Besides, for most shale oil producers, the end of 2017 could be a make or break period, as their current production hedge contracts are ending.

The EIA reported a smaller-than-expected build of 5.9 million barrels in crude oil inventories for the week to September 8, after a 4.6-million-barrel build in the prior week due to the Gulf Coast refinery shutdowns. Crude oil production has begun to return to service, with output rising to 9.4 million barrels per day last week from 8.8 million bpd a week earlier. Refineries recover production as well. In its latest Outlook the EIA said that the effect of the supply disruptions on the Gulf Coast will last for a while, which would boost the uncertainty around oil and fuel prices in the coming weeks. In production, the EIA forecasts an average daily of 9.3 million bpd for this year, and 9.8 million bpd for 2018.

North Korea remained defiant over new U.N. sanctions imposed for its latest nuclear test, promising to redouble efforts to fight off what it said was the threat of a U.S. invasion. Last week U.S. President Donald Trump aimed his rhetoric at the countries who continued to do business with North Korea. China is just the one of them. The possibility of broader sanctions against major Chinese companies could affect the U.S. operations of several of China’s oil majors, as well as many of Beijing’s biggest banks with assets in America. Meantime, a major widespread sanctioning of big Chinese companies could result in retaliation on U.S. firms—including major S&P 500 companies—with their business in China.

In addition, there are some more signs that oil and fuel indexes may resume rally in a short and medium term. Additional support could come from a possible new crisis in Iraq (the Kurdish Independence Referendum nears), and with the U.S. preparing strong action against Iran in the near future. Both issues could easily take out substantial amounts of crude oil the coming months. The Qatari issue should also be factored in. The situation is reaching critical point, and could easily result in negative effects for Gulf based oil and gas supply and production. At the same time the negative effects of the current Hurricane Season could be mitigated by the positive effects of rebuilding efforts in Texas and Florida. So, we expect bunker fuel prices may have moderate upward 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 Exchange

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