The Bunker Review is contributed by Marine Bunker Exchange
World fuel indexes have rallied more than 6 percent since last week, which has largely been attributed to growing confidence in a six-month extension from OPEC combined with a temporary outage in Libya and slightly better numbers from the EIA regarding refined product inventories. These supportive trends, however, could be overwhelmed by other factors, such as weaker-than-expected Chinese demand, supply growth in the U.S., and still possible failure of OPEC to extend its deal beyond June.
MABUX World Bunker Index (consists of a range of prices for 380 HSFO, 180 HSFO and MGO at the main world hubs) has slightly risen in the period of Mar.30 – Apr. 06 with no firm trend:
380 HSFO - up from 287.86 to 298.43 USD/MT (+10.57)
180 HSFO - up from 330.07 to 341.07 USD/MT (+11.00)
MGO - up from 512.21 to 518.07 USD/MT (+5.86)
The global oil industry cut upstream investment by around 25 percent each year for the past two years. It forecast 2017 should see a rebound in spending, but only slightly, and a return to the high spending levels of 2014 is not expected for the fore-seeable future. The IEA in turn has repeatedly warned that a lack of investment today may lead to a supply shortage towards the end of the decade, as too few projects come online to meet rising demand.
The main supportive driver for oil and fuel indexes is output cut agreement. To-gether, OPEC and the 11 non-OPEC producers that signed up for the cut were sup-posed to take off 1.8 million barrels from the global daily average supply. As per preliminary estimate, crude output by OPEC members fell by 200,000 barrels a day down to 32.095 million barrels a day in March, helped by cuts in Nigeria and Libya that aren’t part of a production-curbing accord. Among the 10 members bound by output caps, compliance weakened to 89 percent of pledged reductions from 104 percent. The cuts have failed to raise prices in any substantial way, and now some OPEC members are talking about an extension of the agreement beyond the June 30 deadline.
However, nothing concrete will be agreed to until they meet in April. At that meeting, a formal recommendation will be proposed on whether or not the cuts should be extended. Then, the agreement will be finalized at the May 25 meeting. Besides, not every member of the deal fully supports such a move. Saudi Arabia said it will only agree to an extension if global inventories continue to exceed the five-year average. Russia said it needed more production and inventory data before it considered signing up for another six months of cuts.
According to Russian statistics, the country has cut crude oil production by 200,000 barrels daily. That’s two-thirds of the amount it agreed to cut under the OPEC-non-OPEC agreement. It was also repeated that the country would reduce production gradually, raising suspicions about whether it will try to find a way around it. Still, the amount is small compared to its total daily output, but the cut may be helped by the start of maintenance season.
This week global fuel market saw also a sudden supply outage in Libya. The loss of 250,000 bpd from disrupted oil fields due to ongoing security issues took a substantial source of output offline. At the moment crude oil production at the Sharara field in western Libya – the country’s biggest – has resumed and the force majeure that the state-owned oil Company NOC had placed on the field was lifted. However, the political situation in Libya remains highly unstable, and future disruptions to oil supply are very likely – the potential factor of support for the fuel prices.
As part of the OPEC deal, Iraq has cut its oil production by more than 300,000 bpd, and so far in March its average output stands at 4.464 million bpd. Iraq’s com-pliance to OPEC’s cuts is 90 percent: March production figure is 113,000 bpd above the level fixed by the agreement.
Possible deal extension would probably lift prices from their sub-$50 level, and that would again motivate U.S. shale drillers to continue pumping more. The Energy Information Administration expects U.S. oil output to climb further to 9.73 million bpd in 2018. The oil rig count continues to rise as well: it jumped by 10 up to 662, the 11th weekly increase in a row. In fact, cheap shale output from the United States is threatening the effectiveness of the OPEC agreement, diminishing the likelihood of ending the supply glut.
Rising supplies were partly compensated by data from Asia this week: manufacturing data showed factories across much of Asia posted another month of solid growth in March. Purchasing managers' index (PMI) data from China also showed its factories expanded for a ninth straight month in March, although the pace slipped as new export orders slowed.
China became the biggest buyer of U.S. crude oil in February, surpassing Canada, at a time when OPEC is cutting back output. China imported 8.08 million barrels of U.S. light crude, nearly quadrupling its January purchases. That helped boost U.S. exports to a record 31.2 million barrels during the month. Canada, the U.S.’s largest trade partner, imported 6.84 million, down 20 percent from a month earlier.
One more thing: according to the Financial Times, seaborne oil tanker traffic is down this year by 16 percent, which may suggest that the supply cuts are being felt in the market.
The next steps for fuel prices depend largely on what OPEC does over the next few weeks. We do not expect any drastic changes in bunker prices trends in near-term outlook: indexes may continue slight upward evolution.
* 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)