The Bunker Review is contributed by Marine Bunker Exchange
World fuel indexes continued slight downward evolution this week. Oil inventories are declining around the world even as they remain near record highs in the U.S. OPEC compliance is high, but the market is still uncertain if the cuts will be enough to sufficiently drain stockpiles. The main dynamic is still how the OPEC production cuts stack up against the pace of growth from U.S. shale and others.
MABUX World Bunker Index (consists of a range of prices for 380 HSFO, 180 HSFO and MGO at the main world hubs) has decreased in the period of Apr. 20 – Apr. 27:
380 HSFO - down from 297.79 to 285.21 USD/MT (-12.58)
180 HSFO - down from 337.71 to 326.50 USD/MT (-11.21)
MGO - down from 518.43 to 508.21 USD/MT (-10.22)
Fuel indexes were down over the past few days, but Goldman Sachs tried to reassure the markets, saying that there is no evidence to justify the price declines. The investment bank tells investors to keep their focus, pointing to ongoing declines in crude oil inventories, drawdowns that are expected to pick up pace this quarter. As per bank, price declines were driven more by speculative moves than the fundamentals. As a result, prices should firm up.
There are in fact early indications that at least some inventories are starting to draw down. However, inventory levels are hard to judge outside of the United States, as many countries do not release specific figures. Oil shipments show an ongoing excess, while price activity in oil futures suggests optimism the imbalance is being corrected. Global crude shipments, which monitor tanker movements but exclude pipeline flows, hit a record 47.8 million bpd in April, up 5.8 percent since December, before cuts were implemented. This is in part due to a jump in production and ex-ports from producers who did not agree to cuts, especially the United States.
Inventories in OECD countries finally started to drawdown in February and March, although gains in the U.S. through the end of the first quarter meant that the total decrease was rather limited. Now, U.S. inventories are starting to decline, which means that the overall drop in global inventories is likely to accelerate in the next month or two.
The chances of an oil agreement extension still seem good, but ultimately the decision to maintain production cuts will come down to whether or not the participat-ing members view the reductions as a success. OPEC’s monitoring committee, which was charged with overseeing compliance with the collective production cuts, has already endorsed a six-month extension. The endorsement means that unless something unforeseen happens, OPEC will push for a passage of an extension at its official meeting in May. Compliance with supply curbs by OPEC and its allies from outside of the group was 98 percent in March, an improvement from February.
Russian Energy Minister Novak will hold talks with Russian oil companies this week before his meeting with OPEC and non-OPEC counterparts in Vienna on May 25. As per Russia, the issue of whether to prolong the deal was under discussion and would depend on the market situation by the time when the current half-year agreement expires. Current output in Russia is down 250,000 barrels a day from October and it is expected the nation’s pledged cut of 300,000 will be fully implemented by the end of this month. Until now, Russian oil companies were saying they would ramp up production after the agreement expires in June. Meantime, according to some comments by Russian officials, country’s oil output could climb to its highest rate in 30 years if the OPEC and non-OPEC producers do not extend a six-month supply reduction deal beyond June 30.
U.S. drillers added 5 oil rigs for a 14th week in a row, to 688 rigs, extending an 11-month recovery that is expected to boost U.S. shale production in May by the big-gest monthly increase in more than two years. Nevertheless, the pace of drilling ac-tivity slowed as investors worry that growing shale production will ruin OPEC’s efforts to prop up prices. Production also climbed by 13,000 barrels a day to 9.265 million barrels a day last week, the highest since August 2015. U.S. supplies of crude are still near records and more than 100 million barrels higher than the five-year average for this time of the year.
Crude arrivals from the U.S. are also surging. American exports ran in early April at a four-week average of 706,000 barrels a day, up nearly 90 percent from the same time of last year. In January and February, the nation’s exports to Europe climbed almost fivefold to 178,000 barrels a day.
Iran’s crude oil exports in May will likely hit their lowest volume in 14 months, as the Islamic Republic has cleared tanker storage and Asian buyers are set to load less crude. Crude oil exports in May are expected to be at 1.66 million bpd, and nearly 100,000 bpd will be put back into storage on tankers (for April, Iran is seen exporting 1.8 million bpd of crude oil). This also compares to exports of crude and condensate combined of almost 2.9 million bpd in February, which marked a six-year high.
Another supportive factor for fuel indexes: the dollar weakened against the euro recently as a snap poll showed centrist Emmanuel Macron would win the second round of voting in France. The voting results reduced the prospect of an anti-establishment shock on the scale of Britain's vote last June to quit the European Union and the election of Donald Trump as U.S. president. Besides, it curbed threats to the euro zone and encouraging investors to embrace more risk.
The El-Feel oil field in western Libya had reopened on Apr.19 after two years and expects to start pumping oil as soon as a power outage is fixed. It could add up to 90,000 bpd to Libya’s oil output that has been crippled by continuous faction fighting and political turmoil. Libya’s NOC has said that it would target production of around 1.2 million bpd by the end of this year, but this level is currently non-realistic. As per OPEC’s secondary sources, Libya - exempt from the production cuts due to the violence - produced 622,000 bpd in March, down from 683,000 bpd in February.
All in all, OPEC almost has no choice but to extend the production cuts for an-other six months. The question is still how much a cut extension will impact the mar-ket, and whether it will deliver the boost in prices that OPEC is hoping for. The meet-ing is several weeks away. In the short run, we expect bunker prices will continue fluctuations, and the volatility on the market remains.
* 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)