Global bunker market: OPEC meeting is in focus
The Bunker Review is contributed by Marine Bunker Exchange
Global oil markets are still not stabilized. After a week of price shocks, with the expecta-tions that crude prices could be hitting the $40 per barrel mark soon, prices are up again. OPEC and Russia have agreed to extend the oil production cut deal until March 2018. The significant point here was the support for a nine-month extension rather than just an extension through the end of the year. The news immediately sent prices higher, although the rise was capped by yet another weekly build in the number of active drilling rigs in the U.S.
MABUX World Bunker Index (consists of a range of prices for 380 HSFO, 180 HSFO and MGO at the main world hubs) has increased slightly in the period of May. 11 – May. 18:
380 HSFO - up from 286.14 to 296.36 USD/MT (+10.22)
180 HSFO - up from 328.36 to 339.64 USD/MT (+11.28)
MGO - up from 503.14 to 507.21 USD/MT (+4.07)
OPEC and Russia have openly discussed a potential nine-month extension of the produc-tion cut deal. The main reason for it is that the present cuts are bringing inventories down at a much slower rate than originally anticipated. As per some evaluations, even extending the cuts through December would only bring inventories down by just 722,000 bpd for a total reduction of about 120 million barrels. That is less than half of the 276 million barrel surplus that existed just in OECD countries at the end of the first quarter.
Both: Saudi Arabia and Russia are sure that an extension through the first quarter of 2018 will do enough to decrease inventories, supporting fuel prices, but not boosting them so much that U.S. shale comes back even quicker than it already is. They will present their position at a meeting of OPEC and other nations that are part of the agreement on May 25 in Vienna.
The OPEC/non-OPEC coalition is also trying to bring new countries into the deal, includ-ing Egypt and Turkmenistan. It is doubtful that some contributions from them – with a com-bined total output of 700,000 bpd – would significantly change the pace of adjustment, but their participation may add some psychological support to the market.
At the same time OPEC boosted estimates for growth in rival supplies by 64 percent as the U.S. oil industry’s recovery accelerates. The forecast said production from outside the OPEC will increase by 950,000 barrels a day this year (up by about 370,000). The projection is four times higher than in November, when the group announced a production cut. The cartel also raised its outlook for U.S. production growth by 285,000 barrels a day to 820,000 a day. Non-OPEC nations pump about 60 percent of the world’s oil.
So a nine-month extension could result in removal of around 1.8 million bpd from the market, making enough room to counter the expected 1 million bpd of additional oil from non-OPEC countries.
Meanwhile, two OPEC members: Libya and Nigeria, which were exempt from reducing output because of internal problems, are boosting supplies again. Libya’s crude production has risen to more than 814,000 barrels a day as fields restart, the most since 2014. Nigeria’s 200,000 barrel-a-day Forcados oil pipeline is ready to export again after being shut down almost continuously since February 2016. It’s unclear whether the countries would still be exempted if the deal is prolonged.
Iraq is another risk for OPEC cut deal. Through the first three months of the year, Iraq has made some cuts but has still not brought production down to its promised target (it signed on to cuts of 210,000 bpd). Meantime, there were comments from some high-ranking Iraqi officials that the country could ramp production up to 5 mb/d this year which would be well in excess of Iraq's promised limit of 4.35 mb/d.
While OPEC is trying to balance the market, the price gains from its production cut deal added more confidence to the activity and spending plans of U.S. shale. U.S. production jumped to 9.3 million bpd as of end-April, with the EIA forecasting it to hit 10 million bpd in 2018. Now that prices have started going up again, chances are that the growth in U.S. production will continue and even intensify. A new Rystad Energy report said that even if prices fall to US$40, shale producers will continue growing production. There are plans of a combined capital expenditure of US$84 billion this year, an increase of 32 percent compared to last year. By comparison, the budget programs for international projects are seen up just 3 percent in 2017.
And finally, OPEC made a statement that floating oil storage globally declined by a third in the first quarter of the year. The statement supports OPEC’s claims that the production cut has helped to relieve a glut. Earlier this month Reuters reported that there were 35 tankers with a combined capacity of 65 million barrels of crude staying in the Straits of Malacca in Malaysia – one of the main global oil shipment routes. However, as per other sources, the global supply had not dec lined. On the contrary, the figures suggested maritime supply, and more specifically OPEC supply, actually went up in the first quarter of the year, by as much as 700,000 bpd. The speculations around these figures may cap the potential rise of the fuel indexes.
So for now there doesn’t seem to be a choice. It’s either to extend or to suffer oil back to the US$30s, which most OPEC members and Russia cannot afford. We expect global fuel market’s volatility to be continued until OPEC meeting. Bunker prices may demonstrate slight upward movement 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)