The Bunker Review is contributed by Marine Bunker Exchange
World fuel indexes have turned into upward trend during the week on the sudden surge in optimism surrounding an OPEC deal. Cartel is in a final week of talks to try to overcome differences about how to share output cuts and implement the supply deal first outlined in late September. At discussions in Vienna this week - ahead of a ministerial meeting on Nov. 30. - OPEC delegates said an agreement was imminent. As another positive signal, Goldman Sachs hiked its oil price forecast this week by a substantial amount. The investment bank expects oil prices to average $55 per barrel in the first half of 2017, up sharply from the previous estimate of $45 to $50. The bank is now “tactically bullish” on oil.
MABUX World Bunker Index (consists of a range of prices for 380 HSFO, 180 HSFO and MGO at the main world hubs) has demonstrated steady upward evolution in the period of Nov.17 – Nov.24:
380 HSFO - up from 250.07 to 269.57 USD/MT (+19,50)
180 HSFO - up from 293.64 to 310.00 USD/MT (+16,36)
MGO - up from 458.21 to 472.57 USD/MT (+14,36)
The Organization of the Petroleum Exporting Countries (OPEC) is trying by Nov. 30 to bring its 14 member states and non-OPEC producer Russia to agree on a coordinated production cut to prop up the market by bringing production into line with consumption. Qatar, Algeria and Venezuela leading the push to overcome the divide between the group’s biggest producers. Saudi Arabia, Iraq and Iran are still at odds over how to share output cuts.
Iran’s oil output has almost returned to its pre-sanction level. The nation reported OPEC that it raised total production last month by 210,000 barrels a day to 3.92 million, the biggest increase since sanctions were lifted in January. The country won an exemption in September to an outline deal among members of the Organization of Petroleum Exporting Countries to cut output, allowing it to continue developing its oil fields. Doing so will require outside technology, management expertise and capital, so the government has called on foreign companies to invest $100 billion in the oil industry.
For now, both, Iraq and Iran have raised oil output to record highs. Together they produce more than 8 million barrels of oil a day, nearly a quarter of the oil pumped by the group, and both want to boost their output further. Their ambitions are the main obstacle to the Saudi-backed effort to trim the group’s output and buoy prices. Even if members reach a deal next week and accept production quotas, the reluctance of Iraq and Iran to cut output may un-dermine the stability in global oil markets. That could also cost Saudi Arabia market share as its two biggest OPEC competitors keep their output unchanged.
As a step forward, Iraq signaled that it could be willing to cut its production and support OPEC’s efforts to reduce the glut and prop up prices. Besides, it offered three proposals to OPEC members. Details of the proposal were kept undisclosed, but Iraqi officials sounded cooperative saying that they are optimistic about reaching a fair agreement that would take into consideration everyone’s interests and that puts an end to the glut.
Russia said that it was ready to freeze production at today’s level, adding more optimism to cut output talks. Meanwhile, Russia announced on Nov.21 that it is pushing back a meeting between President Vladimir Putin and Russian oil firms until December 19 - until it becomes clear that OPEC has successfully reached an agreement. At the same time Russia has been ramping up oil output with its production hitting a new post-Soviet era high at 11.2 million bpd in October.
OPEC in its turn is now producing at least 236,000 barrels per day (as of October) more than they were in September. That means that in order to reach the stated goal of bringing output down into the range of 32.5-33.0 million bpd, OPEC will now need to make even sharper cuts – somewhere of 600,000 to 1.1 million bpd. Besides, the latest reports suggest that OPEC is discussing a six month agreement rather than one that would last a year, and in this case the effort may produce very little in the way of balancing the market.
One more thing: even if OPEC actually agrees to substantive and sustained cuts in output, that may merely initiate U.S. shale, which could come back to life if oil prices move closer to $55-60 per barrel. Even today, with prices below $50 per barrel, the rig count has been climbing for half a year, and now stands at 588 rigs as of last week, up almost 200 rigs from May.
The economic data out in the U.S. has been also particularly positive. Initial jobless claims came in at 235,000 - the lowest since 1973. Meanwhile, housing starts were up 25.5 percent - the most since 1982. This has further supported expectations for a December interest rate hike. Hence the U.S. dollar is pushing on at its highest level since 2003 and is serving as a counterweight to OPEC production cut optimism today.
All in all, world is still oversupplied with oil and fuel. Inventories of fuel oil held in the Amsterdam-Rotterdam-Antwerp (ARA) region rose 537,000 tonnes, or 84 percent, to 1.174 million tonnes during the week ending 17th November (the highest level in six months). The stock increase because of logistical circumstances. When the inventory data was measured, two VLCCs were about to load fuel oil cargoes headed for Singapore. Additionally, the rise in water levels along the river Rhine enabled refiners to send bigger number of vessels carrying fuel oil to ARA storage facilities.
The current situation suggests that an OPEC agreement might spark a short-term rally, but unless they agree to real and sustained cuts, the poor fundamentals could ensure the price increases are temporary. We expect rather volatile week ahead when bunker prices may face wide range of irregular fluctuations.
* 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)