World oil indexes have continued firm downward trend during the week. The main factor was news that OPEC and its partners, including Russia, are considering a loosening of their production limits. Additional pressure was added by a report that the U.S. government had asked Saudi Arabia and other major exporters to increase oil output. The spread between the two benchmarks (Brent and WTI) is rare, and reflects uncertainty and confusion in the global fuel market, as well as regional differences in supply and demand.
MABUX World Bunker Index (consists of a range of prices for 380 HSFO, 180 HSFO and MGO at the main world hubs) also demonstrated downward trend in the period of May.31 – June 07:
380 HSFO – down from 435.14 to 431,29 USD/MT (-3.85)
180 HSFO – down from 477.07 to 472,07 USD/MT (-5.00)
MGO – down from 692.57 to 674.29 USD/MT (-18.28)
WTI dropped to a more than $10-per-barrel discount to Brent this week, the widest spread in three years. The pipeline bottlenecks in the Permian are starting to bite. U.S. ex-ports of crude are rising, while Brent-linked cargoes in the Atlantic Basin are struggling to find buyers.
The U.S. government has asked Saudi Arabia and some other OPEC producers to increase oil production by about 1 million barrels per day (bpd). The request comes after U.S. retail gasoline prices surged to their highest in more than three years and President Donald Trump publicly complained about OPEC policy and rising oil prices. It also follows Washington’s decision to reimpose sanctions on Iran’s crude exports that had previously displaced about 1 million bpd from global markets. The request for extra oil are among the most forceful U.S. intervention in OPEC affairs since Bill Richardson (the energy secretary during the second administration of Bill Clinton, phoned the Saudi minister in the middle of an OPEC meeting in 2000 asking for a production increase). That time the intervention aggravated a dissent between Saudi Arabia and Iran.
Meantime, Saudi Arabia and Russia committed to ramping up production to as much as 1 million barrels per day before the production cut deal ends at the end of this year, should it be-come a necessary step to meet demand with Venezuela’s falling production and Iran’s possible production or export shortfalls in the wake of US sanctions against it. Oil prices took another blow with Rosneft unexpectedly increasing production by 70,000 bpd. Iran and Kuwait are leading a faction within OPEC accusing Saudi Arabia of capitulating to U.S. and Russian pressure to drive the price of oil down. OPEC meets formally on June 22 to set oil policy. It is expected to agree to raise output.
Venezuela’s production declined to 1.45 million bpd from 1.50 million bpd in May, compared to the implied target of 1.972 million bpd, which means that Venezuela’s involuntary cut in May was 617,000 bpd-more than the cut pledged. Besides, country is struggling to meet its supply obligations, with dozens of tankers waiting to take on its oil. The back-log is so severe that state-owned PDVSA has told some customers it may declare force majeure.
Over the past few weeks, Iran has repeatedly sought EU support to offset renewed U.S. sanctions. Tehran wants the EU to help safeguard its oil export revenues, its most important source of income, by enlisting the help of European central banks. Consequently, the EU has been considering bypassing the U.S. financial system by handling oil purchases from Iran in euros in-stead of U.S. dollars.
The consequences of the U.S. withdrawal from the Iran nuclear deal, the possible Irani-an response, and the actual physical barrels of oil that could be taken off the market are still very much an important factor for fuel prices. One of the most drastic reactions from Iran could be Tehran pulling out of the 1968 Treaty on the Non-Proliferation of Nuclear Weapons (NPT) (a treaty in which 93 countries, including Iran, have vowed never to obtain nuclear weapons).
President Trump resumed trade war last week, slapping steel and aluminium tariffs on Canada, Mexico and the EU and industrial tariffs on China. The decision comes after offering exemptions to U.S. trading partners in recent months, and comments from the Treasury Secretary just two weeks ago that the trade war would be put on hold. The resumption of a trade war threatens to undermine demand, although the magnitude of the slowdown is hard to predict.
US oil production is also pressing down on fuel prices, and for the week ending June 01, reach-ing 10.8 million bpd—the fifteenth build in as many weeks. US production continues to climb at a time when OPEC is obliged to a supply cut deal. When the deal was announced, the United States was producing 8.6 million bpd. Today, the US is producing more than 2.0 million bpd over that figure. US drillers also added 2 rigs to the number of oil rigs last week. The oil and gas rig count now stands at 1,060—up 144 from this time last year.
The shipping industry is going to scrap the largest number of oil tankers this year in over a half-decade. The pace of scrapping comes after years of overcapacity and low rates, with the OPEC cuts also hurting demand for shipping. It is expected, that the poor market conditions will last until next year, but the removal of excess capacity will help.
The market doesn’t know at the moment where the price of oil/fuel is going to be and probably doesn’t know where it should be, and so it’s open to some major price fluctuations. We expect a state of high volatility will retain on global fuel market. Bunker prices may continue slight downward trend 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)