Strong global economic growth supports bunker prices

Oil prices accumulated a more than 1-percent decline last week, pressured by U.S. production growth, despite the variety of bullish demand forecasts and data about tightening global supply. However, in the last few days fuel indexes have recovered after suffering losses late last week supported by a brighter outlook on the global economy for this year and next, as well as by the continued high compliance of OPEC and allies with their joint oil production cuts.

MABUX World Bunker Index (consists of a range of prices for 380 HSFO, 180 HSFO and MGO at the main world hubs) rose in the period of Jan.18 – Jan.25:

380 HSFO – up from 372.64 to 376,07 USD/MT (+3.43)
180 HSFO – up from 413,07 to 416,29 USD/MT (+3.22)
MGO – up from 634.64 to 641,71 USD/MT (+7.07)

Statements emerging from the OPEC meeting in Oman on Jan 20 seemed to build greater confidence in the group’s efforts this year. Saudi Arabia’s note about existing readiness to continue cooperation beyond 2018 was interpreted by market as a possibility that the production cuts will be extended yet again, although the mechanism hasn’t been determined yet. Russia in turn said that all will depend on expediency and necessity. As per Russia, the format of cooperation between OPEC and non-OPEC countries can be used as a consultations format after the deal is over. The comments eased fears of faltering compliance with the production cuts.

The International Monetary Fund (IMF) revised upward its forecast for world economic growth in 2018 and 2019, to 3.9 percent for both 2018 and 2019 (a 0.2 percentage point increase from its last update in October). The reasons are the economic outlook and seasonally colder weather which have led to firmer oil demand growth

Meantime, the IEA’s latest Oil Market Report gives a mixed picture for prices. Clearly, the market is tightening, but it is expected that shale growth will be kind of explosive this year. The agency revised up its forecasts growth for U.S production from 870,000 bpd to 1.1 million bpd in 2018. That, combined with gains from other non-OPEC countries, could end the price rally, although a lot of uncertainty remains. As per IEA, rises in U.S. oil production will account for 80 percent of the global oil production increase by 2025. 2025 is expected to mark the peak of oil demand. From then on, demand decline consistently, pressured by fuel efficiency and alter-natives to internal combustion engines.

It should be also noted, that OPEC acknowledged that U.S. shale is growing faster than it previously thought. The group revised up its forecast for U.S. oil production growth this year to 1.15 million bpd, an increase of 160,000 bpd from last month’s report. The revision indicates that the OPEC cuts are helping tighten the market, but the knock-on effect is that it is providing more flexibility to shale producers, something the cartel had hoped to avoid.

In Syria, Turkey’s army and rebel allies battled U.S.-backed Kurdish militia in the Afrin province on Jan. 21. There are serious concerns that Turkish campaign against Kurdish fighters has opened a new front in Syria’s civil war. Conflict between Kurds and Turkey usually implies that oil and fuel prices would move higher due to the region’s strategic position in oil supply routes.

Venezuela’s December output declined to 1.6 million barrels per day, falling by 216,000 bpd from a month before. The shocking single-month decline raises the prospect of a much more serious meltdown in the country’s oil sector than previously expected. Debt, lack of maintenance, a lack of cash to invest, the decrepit state of PDVSA’s oil assets, and a brain drain are all contributing to the steep decline. Forecast sees output falling to 1.3 million bpd this year. Over the course of 2017, Venezuela’s oil production fell by 649,000 bpd, a loss of 29 percent. Those losses offset around two-thirds of the gains that came from the U.S. over the same timeframe.

The Niger Delta Avengers (NDA) (the militant group) threatened on Jan.17 to unleash the round of attacks on Nigeria’s oil sector. In the absence of significant militant attacks in 2017 Nigeria managed to gradually increase its crude oil production: in December, it rose to 1.9 mil-lion bpd, from 1.84 million bpd in November and 1.78 million bpd in October. The market has questioned the capacity and ability of Nigeria to further increase its respective production due to security, financing, and technical challenges. Now Nigeria may be facing another round of militant attacks on its infrastructure, which could knock production offline and boost oil and fuel prices.

The number of oil rigs in the United States fell by 5 last week after gaining 10 the week before. The number of oil rigs stands at 747 versus 551 a year ago. Despite this, the rig count in 2017 and early this year remains much higher than in 2016.

The U.S. Energy Information Administration reported a draw of 1.1 million barrels for the week to January 19 (this compares with a draw of 6.9 million barrels for the week to January 12) after the American Petroleum Institute surprised the market with a substantial inventory build the day before. At 411.6 million barrels, inventories of crude oil in the U.S. are still within the average of the seasonal range. This is the tenth straight weekly draw, which would only strengthen the sentiment that demand for crude in the world’s top consumer is robust.

US crude oil production in turn rose last week. 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. But two weeks ago production moved upward again to 9.750 million bpd and now further to 9.878 million bpd.

It forecasts that crude oil demand in China will jump by 4.6 percent this year to 12 million barrels per day. Net crude oil imports are expected at 7.7 percent above 2017 levels, to 451 million metric tons, or about 9.06 million barrels per day. The forecast is based on estimated GDP expansion of 6.7 percent, slightly down from 6.9 percent in 2017. Last year, China overtook the United States as the world’s largest oil importer, with its dependency on imports reaching 67.4 percent. This year, this could climb further to 68.8 percent, even if there is a recovery in domes-tic production.

Overall, at the moment oil/fuel prices are unlikely to fall far because markets are being supported by strong global economic growth pushing up oil demand and output restraint by the OPEC-led supply pact. We expect bunker prices may keep slight up-ward evolution next week.

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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