World oil indexes climbed this week. The markets have been primarily focused on the impact of the Iran sanctions. The concerns are how much oil will be removed from the global supply and whether OPEC and its allies can make up the difference. Japan and South Korea have both ceased all oil trading with Iran, and India and even China have drastically reduced oil volumes from the country.
MABUX World Bunker Index (consists of a range of prices for 380 HSFO, 180 HSFO and MGO at the main world hubs), also demonstrated firm upward trend in the period of Sep.27 – Oct.04:
380 HSFO – up from 465.14 to 491.57 USD/MT (+26.43)
180 HSFO – up from 509.57 to 532.14 USD/MT (+22.57)
MGO – up from 729.14 to 761.36 USD/MT (+32.26)
OPEC’s oil production in September rose by 90,000 bpd from August to 32.85 million bpd-the highest level so far this year, but a plunge in Iranian production partly offset higher production in Saudi Arabia, Angola, and Libya. Oil production in Iran dropped by 100,000 bpd from Au-gust to stand at 3.45 million bpd in September, while Venezuela’s production further dropped to 1.25 million bpd last month from 1.30 million bpd in August. These losses resulted in the 12 OPEC members bound by the supply cut deal-all OPEC members excluding Libya and Nigeria and recently joined Congo-actually pumping 70,000 bpd less in September than in August.
Meantime, Saudi Arabia is discussing the restart of crude oil production in the neutral zone be-tween Saudi Arabia and Kuwait. Joint oil production in the neutral zone was suspended in 2015. The neutral zone could be pumping half a million barrels daily in a few months, which would add to more than 10 million bpd of Saudi production and almost 3 million bpd on Kuwaiti production based on the latest figures for July.
Russia’s oil production averaged 11.347 million bpd between September 1 and 27, up by more than 130,000 bpd compared to August and to set a new record-high in the post-Soviet era. In August, oil production was virtually flat compared to July as Moscow kept output at near post-Soviet record, after having reversed most of its production cuts under the OPEC+ deal the previous month. Russia also assured that it can bring a couple of hundred thousand barrels in the short term.
Goldman Sachs admitted that Iran’s supply losses have mounted much faster than expected, having dropped about 0.65 million barrels per day bpd since April. More losses are expected with sanctions set to take effect in early November. Iran’s oil exports to Europe, Japan and South Korea have already plunged to negligible levels. The latest news from India suggests that Indian refiners are going to be much more cautious than expected. It was reported that India, at least as of now, is set to cut oil imports from Iran close to zero in November.
China has cut some purchases from Iran as well. Last month, Chinese refiners and oil traders were said to have started to switch to using Iran-owned tankers for almost all their crude oil imports from Tehran, in order to keep Iranian oil flowing to China. But shipping and insurance sources told that Iran faces difficulties in insuring its own ships because western re-insurance firms are quitting their Iranian businesses.
The U.S. special envoy for Iran told the UN that Washington will make sure there will be enough oil to go around when sanctions against Iran kick in after November 4. This weighed on prices a little. Meanwhile, the EU announced a plan to continue buying Iranian crude via a special-purpose vehicle for barter transactions. The news was bearish for oil, but some analysts expressed scepticism about the efficiency of the mechanism on the grounds that the U.S. could simply expand the scope of the sanctions to include barter deals between the EU and Iran.
Iraq’s ministry of oil has published a very optimistic report on the country’s capability to ramp up production, but internal political issues could lead to a new crisis. On Oct.07, Kurdistan is voting for a new parliament. The Kurdish elections are hugely significant for the region, as they not only decide who is going to be put forward as the potential president of Iraq, but also re-shape the region as an entity and its relations not only with Baghdad, but also with Iran and Turkey. A further destabilisation of Iraq would be an outcome that the market aims to avoid at the moment.
As the trade war between the U.S. and China deepens, political spats between the world’s two largest economies are surfacing or intensifying. And the rhetoric is getting chillier. Issues range from the plight of China’s Uighurs and sanctions against the Chinese military to President Donald Trump’s accusation that China is interfering in upcoming U.S. midterm elections.
It was reported an increase of a single oil and gas rig in the United States last week, bringing the total number of active oil and gas rigs to 1,054 according to the report, with the number of active oil rigs decreasing by three to reach 863. On the production side, the EIA’s estimates for US production were for an average of 11.10 million bpd – the same as last week.
Trafigura and BP Singapore have merged their fuel oil and gasoil trading desks ahead of the 2020 deadline, which will ban all bunkering fuel with sulfur content of more than 0.5 percent unless the vessel has a scrubber. Traders are clearly preparing for a huge slump in fuel oil demand. Last calculations show that the IMO 2020 rules will spur enough demand for middle distillates and low-sulfur fuel oil, with the spread between high-sulfur fuel oil and middle distil-late swelling from US$25 a barrel to as much as US$100 a barrel.
Besides, the IMO 2020 regulations may eliminate demand for around 2 million barrels of high-sulfur fuel oil daily. That’s two-thirds of what the maritime transport sector consumes currently. These displaced barrels of high-sulfur fuel could be processed into lighter fuels, but prices will have to fall enough to make this secondary processing economical.
The tension between dwindling Iranian supply and the extent to which OPEC+ will increase production is going to dominate the market narrative over the next few weeks. We expect bunker prices to continue upward trend in near-term outlook.
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)
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