Crude oil prices turned lower at the start of the week. Rising U.S. output and the sharp jump in the U.S. rig count undermined efforts led by OPEC and Russia to tighten supplies and raised concerns about an acceleration in shale drilling. Meantime, the dollar stopped losing value, re-moving one of the main positive drivers for oil/fuel prices over the past two months. There is growing speculation that inventories will start rising again in the near future.
MABUX World Bunker Index (consists of a range of prices for 380 HSFO, 180 HSFO and MGO at the main world hubs) slightly declined in the period of Jan.25 – Feb.01:
380 HSFO – down from 376.93 to 375,36 USD/MT (-1.57)
180 HSFO – down from 417,14 to 413,36 USD/MT (-3.78)
MGO – down from 643.86 to 643,07 USD/MT (-0.79)
The uncontrollable rise of U.S. shale production is still a joker factor for global fuel market. While OPEC and its partners have managed to push oil prices back to three-year highs, rising U.S. shale production threatens to break the rebalancing process. American drillers last week added 12 oil rigs, the most since March. That may signal a further increase in U.S. crude output, which jumped to 9.92 million barrels a day in the seven days to Jan. 26, the highest level since the early 1970s and close to the output of top producers Russia and Saudi Arabia. The IEA estimates that it will cross 11 million bpd by 2019 and 10.3 this year. Companies are shifting management strategies to pursue profit over growth, and the technological advancements will have to continue.
U.S. commercial crude oil inventories increased by 6.8 million barrels from the previous week: for the first time in nearly three months. At 418.4 million barrels, U.S. crude oil inventories are in the middle of the average range for this time of year. Meantime, the start of maintenance season across U.S. refineries means that demand will decline, which may cause further weekly builds in U.S. crude oil inventories. Yet the size of these inventories cannot be predicted yet, especially with the long string of draws during the winter, when demand for fuel is usually lower.
The U.S. exported an average of 1.7 million barrels per day in October, a monthly record high, and more than twice as high as August levels. U.S. crude exports to Asia accounted for 35 per-cent of the total in the first eight months of 2017, a figure that grew to 40 percent in September and October. China, in particular, started buying up large volumes of U.S. oil in 2017. However, the price differential between WTI and Brent has suddenly narrowed, putting the U.S. export boom at risk. As a result, the slowdown in U.S. exports could create an additional factor sup-porting fuel prices in the short term.
Ongoing optimism that OPEC-led output cuts would also continue supports oil indexes. Oil prices have risen almost 60% from around $43 a barrel in June, benefiting from production cut efforts led by the Organization of the Petroleum Exporting Countries and Russia. The producers agreed in December to extend current oil output cuts until the end of 2018. Overall market conditions remained strong due to the production cuts and healthy demand-growth.
Iranian officials said the Iranian nuclear deal signed in 2015 and that led to the lifting of restrictions on Iran’s crude oil exports is absolutely not renegotiable. The deal was signed by Tehran and the U.S., the UK, Russia, France, China, and Germany. Earlier this month, U.S. President Donald Trump waived the application of nuclear sanctions, but warned that this could be the last such waiver. The UN Security Council and the International Atomic Energy Agency (IAEA) in turn have confirmed that Iran complies with its obligations under the deal. The heightened U.S.-Iran tension in recent months and the possibility of more sanctions on Iran has been one of the primary geopolitical concerns push fuel prices up.
Iraq will begin exporting next week 60,000 bpd of oil from the fields in Kirkuk to an Iranian refinery across the border via tanker trucks, in exchange for refined oil for southern Iraq. Until recently, oil from the fields around Kirkuk was shipped to the Turkish port of Ceyhan via a pipeline owned and operated by the Kurdistan Regional Government. However, after the September independence referendum in Kurdistan, Iraqi troops took control of disputed Kirkuk and the surrounding fields. In the future, Iraq and Iran plan to build a new pipeline from the Kirkuk field to the border with Iran, to replace the tanker trucks.
A new floating production storage and offloading vessel (FPSO) arrived in Nigeria this week, adding 200,000 barrels per day to offshore output capacity. The ship is not ready to begin producing just yet as there are a few more modules on the way that will enhance the vessel’s capabilities. Offshore projects do not face the same threats from Niger Delta militant groups that onshore ones do. Though the militias were largely inactive in 2017, the groups have been threatening to ramp up activities as progress slows on negotiations between Nigeria officials and local leaders.
New sanctions from the U.S. target tankers that were revealed to be delivering oil products from Russia to North Korea. There were discovered eight vessels as perpetrators of a transportation scheme in which ships would lie about their final destinations and head to North Korea with fuel products. At the moment the new measures officially sanction 6 vessels, nine entities (oil, ship-ping, and trading companies) and 16 other businessmen and public officials. Russia isn’t the only country caught supporting North Korea’s fuel needs this month: at least six Chinese ves-sels were delivering oil to North Korean ports as well.
We expect that global fuel market turns into steady mode at the moment. Bunker prices may demonstrate irregular changes 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)