World fuel indexes have turned into downward evolution this week: a sign that it could be a sign of profit-taking after building up huge net-long bets on crude futures. Market backs out of bullish positions, and that could be forcing oil and fuel prices to trade down a bit. Meantime, there is still number of various factors able to support possible rally in fuel prices: strong oil demand growth, weaker U.S. shale growth, falling U.S. inventories, and the return of some geopolitical risk from the Middle East with Saudi Arabia-Iran rising confrontation and with Iraq-Kurdistan standoff. Besides, OPEC and non-OPEC oil producers are moving toward deciding at their Nov. 30 meeting whether to extend a global agreement to curb oil supply further into 2018.
MABUX World Bunker Index (consists of a range of prices for 380 HSFO, 180 HSFO and MGO at the main world hubs) also slightly dropped in the period of Nov.09 – Nov.16:
380 HSFO – down from 364.00 to 356,50 USD/MT (-7.50)
180 HSFO – down from 406,71 to 398,79 USD/MT (-7.92)
MGO – down from 587.86 to 584.29 USD/MT (-3.51)
The International Energy Agency (IEA) lowered its demand forecast by 50,000 bpd in 2017 and 190,000 bpd in 2018, raising concerns that the oil market is actually not as healthy as it seems. That puts demand growth at 1.5 million barrels per day this year, and only 1.3 mb/d in 2018.
The Agency also predicted the supply surge from U.S. shale oil and gas will beat the biggest gains seen in the history of the industry. As per report, by 2025 the growth in American oil production will equal that achieved by Saudi Arabia at the height of its expansion. The boom will turn the U.S. into a net exporter of fossil fuels. Reflecting the expected flood of supply, the IEA cut its forecasts for oil prices to $83 a barrel for 2025 from $101 previously, and to $111 for 2040 from $125 before. The IEA also raised its projections for global consumption through to 2035, despite the growing popularity of electric vehicles. The world will use just over 100 million barrels of oil a day by 2025.
At the same time, Morgan Stanley reported that while U.S. shale drillers could add new production, they won’t be able to keep up with market demand. The investment bank says that the shale sector will have to rise production from about 5.9 million bpd this year to over 7 million bpd in 2018 in order to ensure that the market doesn’t plunge into a deficit. Besides, boosting shale output to 7 million bpd by next year would require shale drillers adding something like 8 to 10 new oil rigs each month. The rig count has fallen steadily since June, and would need to climb substantially to continue to raise production.
OPEC has also published its forecast. According to it, by 2021 oil demand will increase by 2.3 million barrels per day (bpd). OPEC expects fierce competition with North American shale producers for market share, particularly when regulations on shipping fuel take effect in 2020. The International Maritime Organization’s regulations call for a reduction in sulfur emissions to 0.5 percent of fuel content by 2020. The shipping industry consumes about 4 million bpd of bunker fuel, or dirtier high-sulfur residual fuel. The 2020 rules could cut demand in half.
Market’s concern also arises from two recent impacts in Saudi Arabia: both internally, as the kingdom conducts a political purge that could stir opposition, and externally, as it steps up warnings against Iran (accusing Iran of direct military aggression by supplying Houthi rebels in Yemen with missiles). Besides, on Nov.12 a fire erupted at an oil pipeline connecting Bahrain and Saudi Arabia. Iranian officials denied any involvement, but the incident is the latest in a series of events that are intensifying conflict between the Middle Eastern rivals. While no any imminent disruption is expected, Saudi supplies are so critical that the elevated risk transformed into momentary support to crude and fuel prices.
Meantime, satellite imagery suggests that Saudi Arabia is holding more oil in storage than everyone thinks. Saudi officials say that the Kingdom has seen its oil stocks fall by 70 million barrels since the beginning of 2016, but satellite data suggests inventories have actually climbed a bit over that timeframe.
Venezuela’s oil output dropped to its lowest in 28 years last month (only 1.863 million barrels of oil per day (bpd)) likely due to costs related to replace damaged equipment and other financial restrictions. Caracas is currently in talks with creditors to discuss the future of massive debt payments that are getting more and more difficult to meet. Venezuela depends on the oil trade to provide over 90 percent of its government revenues, and a threat of default is still existing.
The U.S. Energy Information Administration reported inventories in the country had risen last week by 1.9 million barrels (forecast had largely expected a decline in inventories). Mean-time, U.S. crude oil production has hit a record of 9.65 million bpd, meaning output has risen by almost 15 percent since their most recent low in mid-2016, pushing fuel indexes down.
As a compensating factor, the sign of strong demand is still rather visible in Southeast Asia. The amount of oil stored on tankers around Singapore has dropped sharply in the last months, the latest indication that OPEC-led supply cuts are successfully tightening crude markets even as U.S. exports have soared. Shipping data shows around 15 super-tankers are currently filled with oil in waters off Singapore and western Malaysia, storing around 30 million barrels of crude. That is half the number of ships in June and down from 40 tankers holding surplus fuel in mid-2017.
OPEC’s meeting on Nov. 30 where cartel is due to discuss output policy, may turn into potential upward driver for the global fuel market. Both Saudi Arabia and Russia have signaled that they’re open to extending the cuts through end-2018. An OPEC extension is likely, but the current uptick in oil prices, rising geopolitical risks, and a steady decline in global stockpiles could push the definitive decision into 2018. Anyway, we expect bunker prices may keep slight upward trend 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)