The Bunker Review is contributed by Marine Bunker Exchange
After an initial price rise on hopes that markets would rebalance quickly, world fuel indexes have been held slightly back by evidence of higher U.S. oil drilling and forecasts of a rebound in shale production.
MABUX World Bunker Index (consists of a range of prices for 380 HSFO, 180 HSFO and MGO at the main world hubs) showed insignificant and irregular changes in the period of Jan.26 – Feb.02:
380 HSFO - down from 310.57 to 304.93 USD/MT (-5,64)
180 HSFO - down from 354.14 to 347.64 USD/MT (-6,50)
MGO - up from 528.57 to 536.21 USD/MT (+7,64)
The latest survey made by a Wall Street Journal predicts that Brent will average $56 per barrel in 2017, up $1 per barrel from the previous month’s forecast. The forecast for WTI was up by $1 to $55 per barrel. This was the first increase in the average estimate in five months. Despite the optimism, many investment banks warn about the downside risks and point out two main trends: OPEC compliance and the strength and speed of the rebound in U.S. shale production.
OPEC and other producers are due to reach the 1.8 million-barrel-a-day reduction target next month. It is expected that nations will fully comply with the deal and the curbs will bring global crude markets into balance early this year. Latest surveys showed that in the period between December and January OPEC's output fell by over 1 million bpd to 32.27 million bpd (in December is was 33.085 million barrels a day) and Russia cut its oil and gas condensate production by around 100,000 barrels per day (bpd) down to 11.11 million bpd. However, the market is waiting for official data to gauge the extent of the decrease. A committee that was formed to monitor the production cuts will meet in Kuwait in mid-March.
However, over the long-term, outlooks are more bearish than bullish with a strong likelihood of increased production in three OPEC countries: Libya, Nigeria and Iran. All three countries were effectively exempt from the OPEC production cuts, for various reasons. Nigeria has suffered significant cuts to production over the last year, mainly due to the activities of militants in the Niger River Delta. Libya has been destroyed by civil war and a fight between its recognized government and separatists in its eastern regions.
Crude production in Iran has reached 3.9 million bpd. The increase came as Iran restores links with energy markets in Asia and Europe. Besides, two crude carriers were en route to Rotterdam, carrying the first cargo of Iranian crude to that port in five years. These deliveries will bring Iranian exports to Europe to over 600,000 bpd, an indication that Iran is regaining market share in the continent. There are also signs that output will continue to rise in February, as Iran schedules its first shipment to Indonesia since sanctions were lifted.
Besides, South Sudan aims to double its oil production to 290,000 barrels per day in fiscal year 2017/2018, up from current output of around 130,000 barrels per day. Since its independence, South Sudan has relied on oil for all income - a situation that has significantly compounded ongoing political and economic instability due to the fall in crude oil prices.
However, the main factor of risk that is able at the moment to offset the cuts from OPEC to some degree is a rebound in U.S. shale. U.S. oil production has risen by around half a million barrels per day since mid-2016 to 8.96 million bpd. The International Energy Agency is forecasting total U.S. production growth of 320,000 bpd in 2017.
Besides, the U.S. weekly oil and gas rig count showed that U.S. drillers added 15 oil rigs last week, bringing the total count to 566. Explorers have added machines for eight months, the longest run since September 2014. It is estimated that the U.S. rig count may continue rising at a rate of seven rigs per week over the first half of the year. By June, if U.S. output is surging again, OPEC might abandon its commitments and begin producing maximum volumes again.
Apart from the supply side of the OPEC deal and U.S. shale, fuel prices may continue to react to the relations between the U.S. and key Middle Eastern producers and Russia, as well as a stronger dollar.
All in all, two main drivers on global fuel market: OPEC’s supply-cut deal and rebound in U.S. drilling activity, are largely neutralizing each other at the moment. We expect irregular changes will prevail in bunker prices’ evolution 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)