02-10-2017

Bunker prices have a good chance to continue upward evolution next week

World fuel indexes have demonstrated firm upward trend during the week. The latest global oil supply data has confirmed that the OPEC/non-OPEC have achieved their goal of cutting oil supply to more manageable levels. Global inventories have dropped lately and global oil demand growth is strong expected to remain so for the year. However, crude is still trading more than 50 percent below mid-2014 levels amid concern over whether output curbs by the OPEC will be enough to eliminate a global glut. A gathering in Vienna last week between OPEC and its allies ended with no decision on an extension or deepening of the cuts beyond the first quarter of 2018, while the potential revival of U.S. shale production is also weighing on the outlook for prices.

MABUX World Bunker Index (consists of a range of prices for 380 HSFO, 180 HSFO and MGO at the main world hubs) also continued upward evolution in the period of Sep.21 – Sep.28:

380 HSFO – up from 328.64 to 331,07 USD/MT (+2.43)
180 HSFO – up from 367,57 to 371,36 USD/MT (+3.79)
MGO – up from 560.07 to 571.29 USD/MT (+11.22)

OPEC met on Sep.22 to consider the possibility of extending the production cuts beyond March 2018. The meeting was uneventful, with no decision taken in regard to recommendations on extending or deepening the production cut deal. Both Russia and OPEC, post-meeting, assured the market that it had won the battle over the oil glut, but pushed out until January the decision on whether it should extend the production cuts beyond March 2018. It was added that OPEC+ is about halfway finished with clearing the global oil glut, and encouraged members to remain vigilant and set upon their task of reining in production.

The cartel and the non-OPEC producers led by Russia have also discussed a proposal to consider informal monitoring of crude oil exports, in addition to supervising compliance to production cuts. However, even if the producers agree to monitoring exports, results would be discussed internally, and OPEC’s secondary sources will remain the only official measuring board for compliance.

The critical point for OPEC is still Nigeria and Libya – two countries that were exempted from the deal and have collectively added about 550,000 bpd since the original deal was agreed to last year. That amount has offset about half of the output reduced by the rest of OPEC – the group agreed to cut production by 1.2 million bpd.

At present, there is still the question whether or not the OPEC+ production cuts should be extended. At this point, the market expects a three-month extension, pushing the deal through the middle of 2018. But there are other scenarios as well: perhaps an extension through the end of 2018, or maybe even deeper production cuts. OPEC reportedly discussed some of these options at its monitoring meeting on September 22, although they did not make an official statement supporting a position.

Goldman Sachs argued that OPEC probably shouldn’t extend its production cuts anyway because the group could cede market share to other producers (i.e. U.S. shale). As per Bank, draining inventories too low would initially benefit OPEC through higher prices, but ultimately OPEC would lose ground as U.S. shale filled the void. Thus, OPEC should let its deal expire and return to higher levels of production. Hopefully, the situation will be clarified at the group’s official meeting in November.

The EIA reported a 1.8-million-barrel decline in U.S. commercial crude oil inventories for the week to September 22, However, at 471 million barrels, U.S. crude oil inventories are still in the upper half of the average range for this time of year. In spite of analyst warnings, oil indexes remained stable, suggesting that market has already factored in the prolonged consequences of Hurricane Harvey and Irma on oil dynamics in the United States.

Storage is on a highest level in the U.S., but it is declining elsewhere. The EIA said short-term floating storage level is now below five-year average and has actually declined to its lowest point since December 2014. Floating storage is a more expensive way to store crude, and will be first to draw down. As an example, the key storage hub Saldanha Bay in South Africa is seen stockpiles decrease. Saldanha Bay is one of the world’s largest crude storage facilities, with the capacity to hold 45 million barrels.

The number of oil rigs in the United States decreased by 5 last week and the number of natural gas rigs increasing by 4. Oil rigs in the United States now number 744 – 326 rigs above this time last year. Although the number of oil rigs are still up significantly year on year, the increases slowed in the Q2 2017, and have reversed in Q3. The third quarter, for which there is still one week to go, has seen the total number of rigs decrease by 12. The signs are clear: US drillers are no longer adding rigs at a high rate, despite the rise in oil prices.

One more potentially supportive factor to global fuel market: referendum on independence in Kurdistan took place on Sep.25. Kurdistan’s confidence at declaring independence from Iraq is based on its sizable oil production that has reached 600,000 bpd. Meantime, Turkey has the largest Kurdish population in the region and sees the referendum as a serious matter for its own security. Iraq and Iran are also strongly opposing the Kurdish referendum. So are the U.S. and Western European powers, who have called for the vote to be cancelled because it could further destabilize the region and distract from efforts to defeat ISIS.

Taking all the above into consideration, we expect bunker prices have a good chance to continue upward evolution next week.

Source: Marine Bunker Exchange

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