Bunker prices to remain volatile next week, may end tad lower, experts says
The Bunker Review is contributed by Marine Bunker Exchange
World fuel indexes are still under pressure of high volatility caused by oil-leading countries’ attempts to reach an agreement on oil cut. Market is estimating chances for oil producers to make progress on it. The agreement, reached in Qatar’s capital of Doha, implies that the four countries (incl. Saudi Arabia, Russia, Qatar and Venezuela) agree to keep their average monthly oil output throughout 2016 at January levels if other major oil producers followed suit.
MABUX World Bunker Index (consists of a range of prices for 380 HSFO, 180 HSFO and MGO at the main world hubs) from Feb. 19 till Feb.25 turned into downward trend again as market optimism on agreement is melting away:
380 HSFO - down from 146,36 to 139,07 USD/MT (-7,29)
180 HSFO - down from 193,14 to 185.21 USD/MT (-7,93)
MGO - down from 369,00 to 358.07 USD/MT (-10,93)
The International Energy Agency (IEA) issued its medium-term outlook reporting the global oil glut will persist into 2017, limiting any chance of a price rebound in the short term as the surplus takes even longer to clear than previously estimated. As per EIA, U.S. shale oil production was expected to fall by 600,000 barrels per day (bpd) this year and another 200,000 bpd in 2017. Despite of that, total U.S. oil output will increase by 1.3 million barrels a day from 2015 to 2021 as drillers lower costs and improve efficiency. The agency boosted world demand estimates through the rest of the decade, and lowered projections for non-OPEC supply, saying that OPEC will have some success in regaining market share even if prices remain subdued , while Iran will displace Iraq as the organization’s biggest contributor to supply growth.
The main driver on the fuel market is still the activity of some OPEC and non-OPEC countries aimed to limit world oil output. Venezuela, Saudi Arabia, Russia and Qatar have already discussed holding a meeting in mid-March for OPEC and non-OPEC oil producers that support the production freeze. As per Venezuela, all oil producers are being consulted to determine where and when the meeting will be held. Venezuela itself has been lobbying for producers to support prices.
However, Saudi Arabia considers that a coordinated production cut by OPEC and non-OPEC exporters was not going to happen as a proposed freeze in output at January levels would require all the major producers to agree not to add addition-al barrels. Meanwhile, Saudi Arabia believes that freezing oil production would be enough to eventually balance the market as high-cost producers will get out of the business and rising demand will slowly compensate the oversupply. As part of the process, it is expected U.S. shale explorers will be decimated in coming months amid a wave of restructurings and bankruptcies: 74 North American producers face significant difficulties in sustaining debt at the moment.
Oman has also supported a cut agreement saying OPEC and non-OPEC producers need to cut oil output by 5 to 10 percent to stabilize the market. Oman confirmed its readiness to cut 100,000 barrels a day as part of any deal.
Nigeria backed Saudi Arabia and Russia in freezing oil production as well while giving Iran and Iraq a way out to regain some of their lost market share due to sanctions and war. As per Nigeria, countries like Iran and Iraq have been out of the market for a while and if they are to come back so their production should be frozen at a higher level than that they have now. Nigeria’s own oil production will be 2.2 million barrels a day this month, unchanged from January.
Meantime, Russia has a relatively diversified economy, but it’s still running the biggest deficit in five years. Nigeria, which depends on oil for almost all of its ex-ports, is trying to prevent a currency devaluation and pleading for development loans to replace the missing petrodollars. Venezuela is even worse off, with debt defaults looming and an inflation rate estimated by the International Monetary Fund at 275 percent.
It seems that at present Iran is still the major obstacle to the oil cut deal: the country was seen as unlikely to agree to the output cap, which does not allow it to regain the market share it lost during sanctions. Recently Iran called a joint Russian/Saudi proposal for major exporters to freeze output laughable.
All in all, there is a risk fuel prices could drop further as there is no realistic prospect of a production agreement and because of the upcoming low demand spring season in the northern hemisphere. 1 - 2 million barrels of crude are currently produced every day in excess of demand, leaving storage facilities around the world overfilled with unwanted supplies.
Besides, market considers there is still little chance that the Organization of Petroleum Exporting Countries will hold an emergency meeting before the next regular one scheduled for June, as without due preparation the meeting should not be productive and would also affect fuel prices. It forecasts that the output freeze should continue for at least three months before considering actual reductions in supply. That could make OPEC’s June meeting in Vienna the venue for decisive talks on output cuts between Saudi Arabia, Russia and other major producers.
U.S. shale drillers had a key role in bringing prices low by adding 4 million barrels a day in less than four years. But now the companies are suffering from it: rigs targeting oil in the U.S. fell by 26 to 413, the lowest number of active machines since December 2009. Meantime, some ways to lower costs and boost output at oil wells were found, allowing drillers to keep enough rigs active so that output is still within 5 percent of last year’s high.
Strong dollar reinforces the Federal Reserve’s message that inflation will rise to-ward its target. The Federal Reserve is scrutinizing inflation for signs the economy is ready for another interest-rate boost, after lifting the benchmark target for the first time in almost a decade in December.
We expect world fuel market will keep next week high volatility ranges and further trend will be greatly depended on the progress of freezing oil production deal. Bunker prices will not have any firm direction while slight downward movement is still possible.
* 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)