22-01-2018

MABUX: Bunker prices wait for the new market catalysts

Last week did not bring any firm trend for world fuel indexes. A production-cutting pact between the Organization of the Petroleum Exporting Countries, Russia and other producers has given a strong support to oil prices, with both benchmarks hitting levels not seen since December 2014. Growing signs of a tightening market after a three-year rout have bolstered confidence that fuel prices can be sustained near current levels. Meantime, the further trend’s forecast is rather contradictive: some see more room on the upside with outages in key oil producing countries, strong demand expected this year and ongoing declines in inventories. But others believe the rally has gone too far and there will be a reaction in U.S. shale very soon.

MABUX World Bunker Index (consists of a range of prices for 380 HSFO, 180 HSFO and MGO at the main world hubs) went slightly down in the period of Jan.12 – Jan.18:

380 HSFO – down from 373.14 to 371,93 USD/MT (-1.21)
180 HSFO – down from 413,64 to 412,36 USD/MT (-1.28)
MGO – down from 635.21 to 634.79 USD/MT (-0.42)

There is a variety of scenarios on how the deal of the OPEC and non-OPEC production cuts of 1.8 million barrels per day (bpd) might come to an end, featuring civil unrest in Venezuela and Iran that may lead to supply disruptions; Russia pulling out of the pact in June; OPEC members and other parties to the deal starting-or continuing-to cheat; and oil prices rising too high.

At the moment Russia may be already on its way out of the OPEC output reduction deal. Russian Energy Minister Alexander Novak may discuss the country’s potential exit from the pact in Oman next week. As per Russia, the market is becoming balanced and the surplus is decreasing, but the market is not completely balanced yet. It needs to be monitored before the decision is made.

In addition to the OPEC+ pact, fuel prices have found support from eight consecutive weeks of U.S. crude inventory drops. U.S. commercial crude stocks fell by almost 5 million barrels in the week to Jan. 5, to 419.5 million barrels. That was slightly below the five-year average of just over 420 million barrels, the target for OPEC and others cutting output.

Despite the oil price rise, US crude oil production dipped last week. It had been on a steady up-ward trajectory during Q4 2017. But the first week of 2018 saw production in the United States slipping from 9.782 million bpd in the last week of 2017, down to 9.492 million bpd. The number of active oil and gas rigs on the contrary rose last week, increasing by 15 total rigs, bringing the total rigs to 939, which is an addition of 280 rigs year over year. The number of oil rigs in the US increased by 10 and stands at 752 versus 522 a year ago.

The EIA sharply revised up its forecast for U.S. oil production this year and next, predicting aver-age output of 10.3 million bpd in 2017 (up nearly 300,000 bpd from last month’s forecast) and 10.8 million bpd in 2019. The EIA predicts that by November 2019 the U.S. could hit 11 million bpd, surpassing Russia as the world’s largest producer. The strength of U.S. shale is one of the main pressure factors on the fuel market, but it remains to be seen if shale drillers can achieve such high production levels.

U.S. President Donald Trump extended sanctions relief granted to Iran under its 2015 nuclear deal with the United States and other world powers. However, Trump, who has vowed to scrap the pact, was expected to give the U.S. Congress and European allies a deadline for improving it. Without improvements, Trump would renew his threat to withdraw from the agreement. Iran in turn said its nuclear program is only for peaceful purposes. It has also said it will stick to the accord as long as the other signatories respect it, but will decline the deal if Washington pulls out. The U.S. Congress requires the president to decide periodically whether to certify Iran’s compliance with the deal and issue a waiver to allow U.S sanctions to remain suspended. The forecasts have projected U.S. sanctions could threaten several hundred thousand barrels per day of Iranian oil production, but unilateral action from Washington won’t be as effective as the coordinated international sanctions from years ago.

China imported 12 percent less crude oil in December than in November, when crude imports had hit a record high, sparking immediate concern about demand from one of the world’s top consumers. The record-high November oil shipments to China were stockpiled, and used by refiners during the last month of the year. Despite the December drop, for full-2017, crude oil import figures reveal a 10.1-percent increase from 2016, at 8.43 million barrels daily. Besides, the first lot of oil import quotas issued by the government last month (121.32 million tons) is also high enough to suggest a rebound in oil imports this year as quotas were 75 percent higher than the first allocations for 2017. China is now the world’s biggest oil importer, overtaking the United States for the first time ever.

India’s oil demand in turn grew at its slowest pace in four years in 2017 at only 2.3 percent. Slower car sales, new taxes, and a campaign by the central bank to remove certain currency notes hit retail and wholesale markets – these factors weighed on India’s fuel consumption. India has long been billed as one of the most important growth markets for global fuel demand, but it continues to lag behind expectations.

In Colombia, the National Liberation Army (ELN) is reported to be restarting its militancy against state forces and oil infrastructure after the end of a critical ceasefire to facilitate talks that would end 53 years of war. As a result, Transandino pipeline stopped operating on Jan. 14 after a bomb planted by ELN rebels caused a crude spill into a nearby river. 20% of government revenues in Colombia come from the exploration, production, and taxation of petroleum products in the country, but three years of low oil prices have lowered that proportion to almost zero.

Meantime, oil production in Venezuela has jumped to nearly 1.9 million barrels per day, suggesting the Latin American nation’s output recovers despite a lack of access to global credit markets. Venezuela’s November production was 1.834 million bpd. However, U.S. newest sanctions prevent Venezuelan oil Companies from repatriating any earnings from the U.S. They also make it impossible to access American credit markets, forcing Venezuela to seek deals with Russia and China to refinance crippling amounts of debt.

The start of 2018 was not so active on global fuel market while the fuel indexes still remained underpinned by tightening supply and strong global demand. We expect bunker fuel prices may stay steady 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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