MABUX Weekly Report: Rising oil production in the U.S. may pressure bunker prices
The Bunker Review is contributed by Marine Bunker Exchange
MABUX World Bunker Index (consists of a range of prices for 380 HSFO, 180 HSFO and MGO at the main world hubs) declined sharply in the period of Nov. 30 - Dec. 07:
380 HSFO - down from 354.43 to 347.14 USD/MT (-7.29)
180 HSFO - down from 396.93 to 388.50 USD/MT (-8.43)
MGO -down from 590.07 to 576.57 USD/MT (-13.50)
OPEC and non-OPEC producers led by Russia agreed on Nov.30 to extend oil output cuts until the end of 2018. After this decision, the main drivers to influence bunker indexes are oil inventories and output levels in the U.S.
OPEC also decided to cap the combined output of Nigeria and Libya at 2017 levels below 2.8 million bpd. Both countries have been exempt from cuts due to unrest and lower-than-normal production. There was also announced, that all parties would review the agreement at the next OPEC meeting in June. That seems to be a formality since the meetings are always a time and place at which OPEC assesses the situations on the oil market, but if the market tightens too much and prices rise significantly, Russia could push to end the agreement early. With oil prices rising above $60, Russia has more concerns that an extension for the whole of 2018 can prompt a rise in crude production in the United States, which is not participating in the deal. Another problem, that may arise, is to find more safety mechanism to finish the agreement not to let prices to fall. At the same time, Goldman Sachs boosted its oil price forecast following the OPEC meeting. It expects crude prices to gain 9 percent over the next year, but U.S. shale will still add new supply.
One of supporting factors today is that crude production from OPEC countries dropped again in November to a six-month low according to Bloomberg. Total production fell 80,000 barrels a day to 32.47 million a day last month. That was the lowest level since May, when output was 32.29 million. Much of the decline was the result of a 100,000-bpd decline from Angola, due to field maintenance.
News from Nigeria also made a little support to the indexes. On November 29 residents of the Bayelsa region in Nigeria disrupted oil production at a field operated by Shell, shutting down two oil wells. Demonstrators demand power supply to their homes from the oil facility nearby.
The pace of China’s oil imports growth is one of the most closely watched indicators on global fuel market. China is importing increasing volumes of oil not only because of demand growth, but also because its domestic oil production is declining as large ageing fields mature and as companies cut production from higher-cost fields amid the lower-for-longer oil prices. Therefore, Chinese dependence on crude oil imports is continuously rising and is set to further grow in the foreseeable future. As a result, China’s oil import reliance exceeded 65.6 percent in 2016 and is forecast to rise to 80 percent by 2030. By 2020, Chinese consumption of crude oil is expected at 12 million bpd.
Moreover, Asian refiners are after U.S. crude oil as WTI continues to trade at a comfortable discount to Brent. Сrude oil shipments from the Gulf of Mexico and the Caribbean to China, Japan, South Korea, Singapore, and Taiwan jumped from about 500,000 bpd at the beginning of this year to over 1.2 million bpd. Data from Kpler showed earlier that in October, the amount of crude leaving U.S. ports averaged 1.6 million bpd, a lot of this bound for Asian refiners. Shipments of U.S. crude to Asia will likely continue to rise as production, especially in the shale patch, is increasing. This will eventually have a negative effect on prices.
The Energy Information Administration reported a 5.6-million-barrel draw in crude oil inventories for the last week. Forecast expected a draw of 3.507 million barrels. But more notably, the EIA confirmed a large build of 6.8 million barrels in gasoline inventories. U.S. crude oil imports averaged 7.2 million barrels per day last week - a decrease of 127,000 barrels per day from the previous week. The EIA also said, refineries operated at 93.8 % of their operable capacity last week. Moreover, U.S. oil rig count rose again last week. The number of oil rigs operating in the US rose by 2 to 749 (versus 477 a year ago). Rising U.S. oil production may level OPEC's efforts in rebalancing the market and that prevents prices from rising much further.
Meantime, researchers have discovered a flaw in the EIA’s official forecast, which might mean that the Agency is vastly overstating the potential growth of oil and gas production. In particular, the EIA has assumed technology has been behind much of the growth of shale, but the researchers said recent growth is more due to the fact that low prices have forced drillers to focus only on the most productive rigs. The conclusion is that total U.S. oil and natural gas production could undershoot EIA forecasts by 10 percent by 2020, a disparity that widens in subsequent years.
The main risk at the market now is that the OPEC’s production cut extension, and as a result rising oil prices, may push U.S. output up. Meantime, both: OPEC and Russia don’t see global inventories falling back into the five-year average until the second half of 2018 - seasonally lower demand during winter months suggests that the destocking process will take a breather in the first quarter. In that case, real progress will not begin until probably the second quarter of 2018. At the same time, forecasts for the prices are quite optimistic. Oil market data from OPEC and International Energy Agency are due to issue next week and would define further trend.
We expect bunker prices may demonstrate slight irregular changes 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)