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Bunker prices have potential to continue moderate upward evolution

World oil indexes have held onto gains in the last few days, finding support from a weaker US dollar and from news that OPEC had eased oil production cuts in July. Meantime, an escalating trade dispute between the United States and China outweighed news of US crude production increase.

MABUX World Bunker Index (consists of a range of prices for 380 HSFO, 180 HSFO and MGO at the main world hubs), continued moderate upward trend in the period of Aug.23 – Aug.30:

380 HSFO – up from 433.57 to 443.07 USD/MT (+9.50)
180 HSFO – up from 483.71 to 492.57 USD/MT (+8.86)
MGO – up from 679.21 to 698.64 USD/MT (+19.43)

The International Energy Agency (IEA) continues to believe that oil demand growth will continue to be very strong, and coupled with the collapse in Venezuela and what it called the fragility of production in countries including such in the Middle East, the oil markets are set for tightening toward the end of this year.

The United States and China escalated trade war on Aug.23, implementing punitive 25 percent tariffs on $16 billion worth of each other’s goods. President Donald Trump has threatened to put duties on almost all of the more than $500 billion of Chinese goods exported to the United States annually unless Beijing agrees to sweeping changes to its intellectual property practices, industrial subsidy programs and tariff structures, and buys more U.S. goods. That figure would be far more than China imports from the United States, raising concerns that Beijing could con-sider other forms of retaliation, such as making life more difficult for American firms in China or allowing its yuan currency to weaken further to support its exporters. Lower level trade talks between the U.S. and China ended on Aug.23 with no major breakthrough.

There is also a question if China will impose tariffs on U.S. LNG. If so Chinese buyers will go out into other markets, presumably, Australia. However, Chinese tariffs on U.S.-LNG would not only have a negative impact on the American LNG industry, causing a shift in global LNG markets, but could harm China as well. China, to date, has procured American LNG cargoes on the spot market. China is the second largest global buyer of LNG, bypassing South Korea last year. Japan remains the global leader in LNG imports.

On the whole, a prolonged trade war would reduce business activity in both the United States and China, and stifle world economic growth.

OPEC and its Russia-led non-OPEC partners in the production cut deal reduced their total oil production in July by 9 percent more than what they had agreed upon. OPEC-only production in July rose by 40,700 bpd from June, to 32.323 million bpd. While falling production in Libya and Iran was not so surprising, Saudi Arabia’s production dropped in July by 52,800 bpd from June to average 10.387 million bpd last month due to a lower than previously expected demand for Saudi crude.

Market has expected the sanctions on Iran to remove between 500,000 bpd and 1 million bpd from the oil market. Iran’s oil customers may have started to drastically decrease purchases of Iranian crude. In the first half of August, Iran’s exports plunged by 600,000 bpd compared to July loadings, due to plummeting flows to India. Meantime, the U.S. hasn’t been able to persuade China to reduce oil purchases, but Beijing has reportedly agreed not to increase its oil imports from Iran. It is quite possible that by Q4 the market will be dealing with either under-supply, decreasing spare capacity – or both.

Earlier last week, the U.S. announced 11 million barrels from the Strategic Petroleum Reserve will be sold this year ahead of the Iran sanctions in order to soften the effect the sanctions are expected to have on global supply. This has mitigated the impact of the sanctions on prices, but it has not eliminated it.

A price war between Saudi Arabia and Iran could effectively put an end to OPEC. Saudi Arabia cut its selling price for oil shipped to all its clients except the United States. Iran did the same and has indicated that it is prepared to do a lot more if any other producer threatens its market share. In fact, statements from senior government and military officials suggest that Iran is ready to go all the way to closing off the Strait of Hormuz.

U.S. sanctions against Venezuela are under consideration again. It is reported that while the ad-ministration is considering the so-called nuclear option of banning purchases of Venezuela’s oil, the more likely scenario will be a narrower ban on the export of U.S. diluent to Venezuela. The move would make it harder for PDVSA to process its heavy oil. The U.S. administration is preparing options to be released within the next three months. Venezuela’s oil production in July dropped to below the 1.3 million bpd mark – at 1.278 million bpd, production plunged by 47,700 bpd from June. It is expected Venezuela’s production to fall to below 1 million bpd by the end of this year.

Oil production in the U.S. was unchanged at 11.0 million barrels a day (bpd). However, the EIA’s new practice of rounding off production figures to the nearest 100,000 bpd makes it tricky to discern production trends.

It is forecast that India may take over from China as the largest source of demand growth in the global oil market by 2024, and between now and 2035 India will add around 3.5 million barrels per day in demand, a third of the global increase over that timeframe. However, in the short run, rising oil prices and a weakening rupee could undercut India’s oil consumption.

The International Maritime Organization (IMO) will ban the use of untreated marine fuels that emit high levels of sulphur oxide (SOx) beginning from 2020. The Exhaust Gas Cleaning System Association (EGCSA) suggests $20 billion will be spent on scrubbers in the next 5 years. However, there are serious considerations that may dampen those expectations. There are al-ready signs refiners are opting to produce more IMO 2020 complaint marine fuels. The International Energy Agency (IEA) anticipates 7 million additional barrels per day of refining capacity to come online by 2023, mostly in the Middle East, China and other emerging Asian markets. Currently, about 16 refinery coking projects are pending or underway in Europe, Russia, Central Asia (Former Soviet Union), and Turkey alone. Turning heavy residual components, like high sulphur marine fuels, into more middle distillates is a key driver.

We expect bunker prices still have potential to continue moderate upward 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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