Bunker market in anticipation of upward correction
The Bunker Review is contributed by Marine Bunker Exchange
World oil prices fell significantly during the week. The latest selloff is the result of both oil-specific problems as well as equity market volatility. The rebound in the dollar and the stock market meltdown have pushed down oil/fuel indexes. Meantime, the surge in U.S. shale production to over 10.27 million barrels per day (bpd) last week, plus expectations of output growth to 11 million bpd later this year, have inspired fears of a return to surplus. Those concerns were supported by a massive increase in the U.S. rig count last week: plus 26 oil rigs, boosting the count to 791, the highest since April 2015.
MABUX World Bunker Index (consists of a range of prices for 380 HSFO, 180 HSFO and MGO at the main world hubs) also demonstrated a steep decline in the period of Feb.08 - Feb.15:
380 HSFO - down from 357.71 to 351,86 USD/MT (-5.85)
180 HSFO - down from 395,07 to 390,79 USD/MT (-4.28)
MGO - down from 614.71 to 597,64 USD/MT (-17.07)
The International Energy Agency (IEA) said in its latest Oil Market Report, that the global oil market could slip into deeper oversupply on the back of non-OPEC production growth led by the United States. At the same time, global economic growth could turn out to be stronger than previously expected and this would help offset the impact of growing U.S. production on prices. The IEA maintained its 2017 oil demand growth estimate at 1.6 million bpd and said this year demand will grow by 1.4 million bpd, a 100,000-bpd upward revision on the January Report's estimate.
A bit earlier the EIA published its latest Short-Term Energy Outlook, in which it drastically revised its forecast for U.S. oil production, predicting the country will hit 11 million bpd by the end of 2018, a year earlier than it previously thought. Surging output threatens to push down oil/fuel prices further. The EIA sees Brent averaging $62 per barrel in 2018, and WTI to average $58.
Goldman Sachs in turn considers that market upward movers such as global economic growth projections, the possibility of supply disruptions, and discipline among U.S. producers still remains (although there were some misgivings about the last factor). The bank also pointed out that despite market's wariness about U.S. oil production growth, long-term car sales projections for the Chinese market as well as forecasts on crude oil demand in the United States provided support to oil/fuel price optimism.
OPEC's total crude oil production averaged 32.30 million bpd in January (down by 8,100 bpd from December) as rising production in Iraq, Saudi Arabia, and Libya did not fully offset an-other massive plunge in Venezuela's production and a small decline in Angola. Venezuela's crude oil production in January 2018 was at 1.600 million bpd, down by 47,300 bpd compared to December 2017: the largest monthly decline in oil production among OPEC's 14 member states. Among the OPEC members that raised their production, Iraq was the leader with an in-crease of 30,200 bpd in January over December, to 4.435 million bpd (higher than quota under the deal-4.351 million bpd).
The Organization of the Petroleum Exporting Countries (OPEC) also said it expected world oil demand to climb by 1.59 million barrels per day (bpd) this year, an increase of 60,000 bpd from the previous forecast, reaching 98.6 million bpd. As per OPEC, non-OPEC supply will also rise by 1.4 million bpd this year, an upward revision of 250,000 bpd from last month's forecast. The revision is rather large and represents an acknowledgement that the cartel's efforts to limit production have allowed U.S. shale to ramp up. Cartel expects, that in the situation of non-OPEC production growth, oil markets would only return to a supply and demand balance to-wards the end of this year.
Iran's Energy Minister said last week the country has the capacity to increase production by 100,000 bpd within five to six days of an end to the production cut deal. It was also said that there is no reason for OPEC to extend the cuts beyond June this year. The statement added pressure to fuel indexes.
The EIA forecasts the United States will become a net oil and gas exporter by 2022: slower domestic demand, along with growth in natural gas, oil, and oil product production will drive the transformation. The report does not detail the main destinations for these exports, but China and India are both likely to be top consignees for both oil and gas. The United States will continue to import crude oil as well, as its refineries need different blends to process into fuels; the heavy grades that go into these blends are typically imported
The budget deal that the U.S. Congress reached on Feb.07 includes the sale of 100 million barrels of crude oil from the Strategic Petroleum Reserve (SPR) between 2022 and 2027-a total volume equal to some 15 percent of the current reserve. The budget deal also involves the sale of $350 million worth of crude oil, or some 5.7 million barrels, this year. Currently, the SPR has around 665.1 million barrels of crude oil stored in underground caverns on the coasts of Texas and Louisiana.
Сrude oil imports to China hit another record last month, reaching 9.57 million barrels daily, for a total of 40.64 million tons. This is 400,000 bpd more than the previous record from March last year. A Rosneft pipeline began operating at an expanded capacity on January 1, which increased the flows of crude into the country. Besides, the increase in oil imports was driven by independent refiners, who rushed to utilize their higher crude oil quotas, that were 55 percent higher than last year's. It forecasts that Chinese crude oil imports will continue to grow over the next few years as the use of oil products grow along with the economic and refinery capacity expansion. The country's import dependence is also expected to grow as imports rise and production de-clines.
China also plans to launch its crude oil futures contract on March 26: a move that will potentially influence pricing of the global fuel market. The launch is aimed at giving the country more levers in pricing crude in Asia. The move would also support China's currency and its role in the global financial system. The creation of the yuan-denominated contract was originally expected about six years ago but has run into delays as turmoil in China's stock markets and other commodity futures raised concerns about its capacity to handle financial turbulence.
The fuel market seems poised for a price correction amid rising supplies, financial turmoil and active positioning from hedge funds in the futures market. Inventories are back close to average levels and it looks that OPEC could overshoot and tighten the market too much. But a price correction doesn't mean that the market will settle in at lower prices for a long time. Demand is rising and OPEC will likely maintain high levels of compliance with its production limits. We expect bunker prices may continue slight downward evolution next week while upward correction is rather possible in the near term.
* 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)