MABUX: Signs for bunker fuel prices to strengthen further
The Bunker Review is contributed by Marine Bunker Exchange
World oil prices managed to climb this week as the Saudi Energy Minister, Khalid al-Falih, said that he expected the production cuts to last into 2019. Other factors buoying prices are tensions in the Middle East after Saudi Arabia insisted that it would pursue nuclear power plans with or without the support of the United States and would even work on developing nuclear weapons should Iran do the same. Weighing on prices this week was rising U.S. crude inventories and oil production, which continued its uptick in the week ending March 23, reaching 10.433 mil-lion bpd.
MABUX World Bunker Index (consists of a range of prices for 380 HSFO, 180 HSFO and MGO at the main world hubs) changed insignificant and irregular in the period of Mar.22 - Mar.29:
380 HSFO - down from 371.29 to 367,79 USD/MT (-3.50)
180 HSFO - down from 409,14 to 408,79 USD/MT (-0.35)
MGO - up from 628.57 to 630,57 USD/MT (+2.00)
The initial upward driver of the week was a statement by Saudi Arabian Energy Minister Khalid al-Falih, who said that OPEC members will need to continue coordinating with Russia and other non-OPEC oil-producing countries on supply curbs in 2019 to reduce global oil inventories.
Iraq in turn supports OPEC's agreement to cut oil output. Iraq, the second-largest producer in OPEC has limited its output in line with OPEC's pledge to cut supply by about 1.2 million barrels per day (bpd) as part of a deal with Russia and other nations.
OPEC has consistently held up OECD inventories as the metric upon which it was basing its calculations. The goal was to drain inventories back down to the five-year average. With OECD inventories about 44 million barrels above that threshold in February - down from a roughly 300-million-barrel surplus at the start of 2017 - the goal will likely be achieved at some point this year, perhaps in the second or third quarter. However, OPEC officials have recently commented that the measurement might not accurately show the state of the oil market. So the group is looking at other metrics. Some variants include non-OECD inventories, floating storage, and days of coverage. Nothing has been decided at the moment and the cartel is set to discuss a range of possibilities in April.
Rising geopolitical Middle East tensions could lead to a disruption in supplies and is another factor supporting the fuel indexes. Saudi air defences reportedly shot down seven ballistic missiles fired by Yemen's Iran-aligned Houthi militia on March 25, some of which targeted Saudi capital Riyadh.
U.S President appointed former U.S. Ambassador to the UN, John Bolton to replace H.R. McMaster as National Security Adviser. The reshuffling is widely seen as a major shift to-wards more aggressive foreign policy, raising the odds of conflict with Iran and North Korea, in particular. U.S. confrontation with those two countries could be supportive for oil and fuel.
Besides, The Trump administration announced plans for a variety of tariffs targeting an estimated $60 billion worth of Chinese goods. The move was met with a stock market selloff, which also pushed down fuel prices. The risk of a trade war is rising sharply, as China has vowed retaliation. The IMF has warned that protectionism poses a grave risk to the global economy. Meanwhile, the Trump administration exempted a series of parties from the previously announced steel and aluminum tariffs, including the EU, Argentina, Australia, Brazil, South Korea, Mexico and Canada.
U.S. oil production hit a record, at 10.43 million barrels per day (bpd),, taking it past top export-er Saudi Arabia and within reach of top producer Russia, which pumps around 11 million bpd. Meantime, the U.S. oil rig count continues to increase, which, as of last week, stood at 804 active oil rigs-up by 152 rigs compared to this time last year. So far in 2018, the oil and gas rig count in the United States has increased by 71 rigs.
The news from the Federal Reserve on U.S. interest rates pushed the dollar to its lowest in over a month, which supported fuel indexes. The FRS raised its key rate by 25 basis points to 1.75 percent on Mar.21 and flagged at least two more increases were likely this year.
China launched an oil futures contract on Mar.26. It is part of China's effort at gaining more influence over how oil is traded, as well as a way to boost the standing of its currency. However, there is a number of concerns among potential investors. Worries include how to freely exchange the yuan because of Chinese restrictions on capital outflows. Besides, it will also add a currency risk to the market. Another factor is that Shanghai International Energy Exchange (INE) has strict daily limits on the number of cancelled orders allowed per account. That's different to international exchanges, like the CME, which uses a ratio based on an investor's traded volume. And finally, Chinese commodity futures investors do not typically trade steadily over the months, but instead pick specific months in which they deal. That could complicate efforts to trade spreads between Brent, WTI and Shanghai.
On January 1, 2020, the International Maritime Organization (IMO) will require shipowners to only use fuel with 0.5 percent sulfur, down from the current 3.5 percent. Shipowners have a variety of options -- distillates, other 0.5 percent sulfur bunker fuels and blended fuels, marine gasoil, premium ECA category fuels, HSFO with scrubbers and alternative fuels such as LNG, although it is unclear which way the industry will go. One of the biggest tanker Companies - Teekay Tankers - says it will likely switch to distillates instead of using scrubbers to process high sulfur fuel oil.
China's increased LNG usage could potentially help global LNG markets reach supply and demand equilibrium earlier than the often-forecasted date of 2022 or even later. Other variables in the equation include increased Qatari output, which will see the country raise its liquefaction capacity from 77 metric tons per annum (mtpa) to over 100 mtpa within the next five years, as well as a so-called second wave of LNG project development in the U.S. that will start to come on-line after the start of the next decade. Australia, for its part, will soon have as many as ten major LNG export projects operational. It increases LNG chances to become one of the alternative eco-fuel for ships in the medium-term outlook.
There are sufficient reasons to expect fuel prices to strengthen further: they will likely be more sensitive to geopolitical risk factors in the near term; the market is only 2-3 weeks away from peak refinery maintenance, after which crude and product demand should accelerate, and, finally, global inventories are at the bottom end of the five-year range. We expect bunker prices may turn into upward evolution next week.
HAPPY EASTER!
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)
